Shanghai Lockdown, China Manufacturing And Services PMI Contracted

China's manufacturing and service sectors compactly slumped into a contraction zone as it was triggered by the government's restrictive measures in several major cities.

On Thursday (31/March), China's National Bureau of Statistics released manufacturing PMI data which slumped from 50.2 to 49.5 in March. This figure is worse than the economist's forecast for a decline to just 49.9. Please note, the level of 50.0 is the boundary that separates the expansion and contraction zones, so a drop below 50.0 practically indicates the entry of the index into the contraction zone.

Conditions that were not much different were also seen in China's services PMI, which experienced a slump from 51.6 to 48.4, far below expectations of a decline to 50.3. This result marked the first contraction in the services sector since August 2021.

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The deterioration in China's Manufacturing and Services PMI data this morning of course had a direct impact on the Composite PMI data which fell to 48.8 in March, down from 51.2 in February. This condition further emphasizes that China's economy is facing severe challenges entering the second quarter of 2022.

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The decline in the manufacturing and service sectors was largely due to the Chinese government's moves to limit production and mobility in many cities. Some of them are Shanghai which is a financial center and Shenzhen as China's technology center. In fact, the restrictions implemented in Shanghai directly impacted the decline in car production due to technical constraints and factory closures.

Please note, the lockdown policy was implemented to overcome the spike in COVID cases. At the same time, the Chinese authorities have actually launched measures to support the business and investment sectors, including the waiver of rental fees for small-scale service companies.

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However, the disappointing performance in the manufacturing and services sectors has made analysts expect the Chinese central bank (PBoC) to cut interest rates and lower the reserve requirement threshold for banks. This is also due to the increasing prospect of China's economic slowdown in 2022. The growth target of 5.5 percent is now seen as too ambitious, given that the economy has so far been dealing with a slump in the property market, weak consumption, and a resurgence of COVID-19 cases.