June-01, 2022: -China’s factory activity contracted slower in May as Covid-19 curbs in significant manufacturing hubs were relaxed. However, movement controls still depressed domestic demand, restrained production, and weighed on the economy in the second quarter.

The official manufacturing Purchasing Managers’ Index (PMI) increased to 49.6 in May from 47.4 in April. On Tuesday, the National Bureau of Statistics (NBS) marked the highest in three months and the third consecutive contraction.

A Reuters poll expected the PMI to arrive at 48.6, below the 50-point mark separating contraction from growth every month.

Though restrictions implemented in the major factory hubs of Shanghai and the northeast eased in May, analysts said the resumption in output was slow, controlled by slow domestic consumption and softening global demand.

In April, finished goods inventories at the national level shot to their highest since 2010. Still, recent lockdowns are likely to prove disinflationary domestically, Julian Evans-Pritchard, an economist at Capital Economics, said.

He added that the glut of supply in China was likely to weigh on export prices.

“After two years in which all of the pricing power was on the side of Chinese producers, the tables have turned,” he said.

That would add more pressure on exports which lost momentum this year, and cast a shadow on the economic rebound.

Many analysts hope that the economy will shrink in the April-June quarter from a year, compared with the first quarter’s growth of 4.8%.

Strict restrictions ravaged China’s economy in April as the country grappled with the worst Covid-19 outbreak since 2020, with economic difficulties in rare aspects worse than two years ago.

As high raw material prices and supply chain chaos eroded margins, profits at China’s industrial firms decreased at their fastest speed in two years in the previous month.

In line with the weakness in the factory sector, services stayed soft. The official non-manufacturing PMI in May improved to 47.8 from 41.9 in April.

As consumers were confined to homes, retail sales in April came down to 11.1% from a year earlier, the most significant contraction since March 2020 because of the other deterioration in Covid-sensitive catering services and declining auto sales.

China’s official composite PMI, including factory and services activity, stood at 48.4, compared with 42.7 in April.