China's factory activity shrinks at fastest pace in 2 years in March

China's factory activity shrinks at fastest pace in 2 years in March

The employees of a Hangzhou factory produce metal parts for furniture on a production line.

BEIJING Reuters -- China's factory activity slumped at the fastest pace in two years in March as the domestic COVID 19 resurgence and the economic fallout from the Ukraine war triggered sharp falls in production and demand, a business survey showed on Friday.

In March, the PMI of the Caixin Markit Manufacturing Manufacturing Purchasing Managers' Index fell to 48.1, the steepest contraction since February 2020, from 50.4 in the previous month.

The 50 point index mark separates growth from contraction on a monthly basis.

The PMI released on Thursday showed that activity contracted at the quickest rate since October 2021, and showed that the manufacturing conditions were in line with the deterioration in manufacturing conditions. The private sector survey of Caixin focuses more on small firms in coastal regions than the official survey.

Domestic and overseas demand fell. A sub-index for new orders declined at the sharpest rate since February 2020 when China grappled with the first wave of COVID 19 outbreaks, leading to a 6.8% contraction in gross domestic product in the first quarter of 2020.

The decline in new export orders in March was accelerated as companies said the latest virus outbreaks in China, disruptions in the shipping sector and more market uncertainties in Ukraine caused customers to cancel or suspend orders.

Input cost inflation hit a five-month high, with a number of factories attributed higher prices to tight global supply chains, which was exacerbated by the war in Ukraine.

The world's second-largest economy, which picked up pace in the first two months of the year, is at risk of slowing down because of the restrictions on production and mobility in COVID-hit cities, including major economic centres like Shanghai and Shenzhen.

It has slowed output growth, with the sub-index for production at 46.4 in March, the lowest since February 2020.

The government officials have pledged to roll out policies to help the economy as downward economic pressure builds, a cabinet meeting said on Wednesday.

The employment index, which was expanded for the first time in eight months, was one of the bright spots in the otherwise sluggish Caixin survey, as factories ramped up hiring after the Lunar New Year holiday.

Since the beginning of 2020, China is facing the most severe wave of outbreaks. In a statement accompanying the data release, Wang Zhe, Senior Economist at Caixin Insight Group, said that uncertainty increased abroad.

The commodity market is convulsed, and the prospect of the war between Russia and Ukraine is uncertain. A number of factors resonate, adding to the downward pressure on China's economy and underscoring the risk of stagflation. Wang said that there needs to be more help for vulnerable groups and small businesses, but also stressed that policymakers need to strike a balance between normal production and public health and safety.