“The latest surveys suggest that China’s economy contracted last month as virus disruptions weighed heavily on services activity,” Julian Evans-Pritchard, senior China economist at Capital Economics, wrote in a Tuesday research note. He added that the non-manufacturing PMI drop was driven entirely by disruption in the services sector as “movement restrictions were reimposed and consumers became more cautious amid the renewed virus flare-up.”
“There continues to be signs of supply shortages in the survey breakdown, with delivery times lengthening further while firms continued to draw down their inventories of raw materials,” Evans-Pritchard wrote.
Covid outbreaks and shipping woes aren’t all that China is dealing with, though. Beijing has also embarked on a massive crackdown targeting businesses. Tech, private education and other industries have all been swept up in the fracas.
The clampdowns — especially in tech and education — “are impacting both employment concerns in those affected and broader consumer confidence as fears of wider interventions rise,” wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, on Monday.
Evans-Pritchard expected most of the weakness reported Tuesday to reverse in September, since Covid cases are under control in China. But he said other concerns persist, pointing to tight credit conditions as posing a “growing drag.”
“The upshot is that, even looking through the volatility caused by China’s recent virus flare-up, the economy looks to be coming back to earth,” he added.