China’s Economy Returns to Growth Mode as Covid Lockdowns Lift
Services and construction activity rebounded in June, while weak export orders weighed on manufacturers, surveys showed
SINGAPORE—Economic activity in China expanded in June after three straight months of contraction, according to official surveys of businesses and factories that point to a modest recovery after Covid-19 restrictions were eased in the world’s second-largest economy.
Economists are downbeat about the prospects for a major revival, however, given the darkening global backdrop and the risk of further Covid outbreaks.
The U.S. and European economies slowed sharply in June as surging prices of energy and food weakened demand for other goods and services, surveys last week showed, underlining how gloomy the outlook has become as Russia’s war in Ukraine saps global growth and high inflation prompts central banks to jack up interest rates.
For China, that pullback in overseas spending means that it can’t rely on exports to propel a robust rebound from its lockdown-induced doldrums, as it did after the initial outbreak in early 2020.
Instead, Beijing is banking this time on an infrastructure splurge to power its economy, though many economists are doubtful that big investments will be enough to offset a sinking real-estate market and subdued consumer and business confidence.
Urban unemployment was 5.9% in May, higher than the government’s target of 5.5% or lower, while joblessness among those age 16 to 24 rose to a new high of 18.4%.
China’s official purchasing managers index for nonmanufacturing sectors posted a reading of 54.7 in June, a big jump from the previous month’s 47.8, the National Bureau of Statistics said Thursday. The surge was led by a rebound in construction and the services sector, where the lifting of Covid-19 restrictions unclogged transportation blockages and allowed people to return to stores and restaurants.
The reading was the highest since May last year, survey data shows, and follows three straight months of declines as lockdowns blanketed major cities such as Shenzhen and Shanghai. A reading above 50 indicates activity is expanding rather than shrinking.
Manufacturing activity returned to growth but the rebound was weaker than economists were anticipating. The purchasing managers index for the manufacturing sector notched up a reading of 50.2, higher than the previous month’s 49.6, but lower than the 50.5 reading expected by analysts polled by The Wall Street Journal.
Overall production rose, but new export orders were weak, the survey showed, highlighting fading global demand.
Weakening demand is the biggest problem that factories now face, said Zhao Qinghe, a senior statistician with China’s statistics bureau, who added that falling factory-gate prices are squeezing companies’ earnings.
Official data earlier this week showed profits at industrial companies dropped 6.5% from a year earlier in May, though that marked an improvement from the 8.5% year-over-year decline registered in April.
A subindex tracking service-sector activity surged to 54.3 from 47.1, while a subindex for construction activity reached 56.6 as infrastructure investment accelerated. China’s cabinet, known as the State Council, said this week that construction began on 120 new expressway and other highway projects between January and May, with overall investment in the road network during that period exceeding the equivalent of $1 trillion.
Separately on Thursday, a survey of 102 member companies by the American Chamber of Commerce in China found that 44% of respondents had reduced or delayed planned investment in China as a result of recent Covid-19 outbreaks, highlighting the strain on foreign businesses from Beijing’s zero-tolerance approach to the virus.
Forty-six percent reported lingering production difficulties even after lockdowns were eased, citing staff shortages, supply issues and other problems, according to the survey, which was conducted between June 22 and 24.