China’s economy is contracting at a sharp pace

China’s service sector has just contracted at the second-fastest pace on record as Covid lockdowns hit businesses.

The Caixin purchasing managers index, a closely watched gauge of the state of the economy, plunged to 36.2 in April from 42 in March, according to a survey released by IHS Markit on Thursday. A reading below 50 indicates contraction, while anything above this indicator shows expansion.

The service sector accounts for more than half of the country’s GDP and more than 40% of its employment. And with survey data showing that China’s manufacturing sector also shrank last month, the world’s second-largest economy pulled back in April.

While conditions could improve this month as rates of Covid infections decline and officials try to limit damage to the economy, much of Beijing has just been placed under tighter restrictions and some economists are now predicting Chinese GDP will decrease in the second quarter.

The nation’s capital has effectively closed its largest district, Chaoyang, suspending transport within it and encouraging 3.5 million residents to work from home as part of its latest effort to contain Covid-19 cases, local officials announced on Tuesday. Wednesday.

The nearly 6-point decline in services activity in April was second only to the collapse in February 2020, when China’s economy nearly came to a halt as it struggled to contain the initial coronavirus outbreak that started in Wuhan.

Companies in the world’s second-largest economy were already grappling with rising energy and raw material costs as Covid lockdowns further hampered their operations.

It has also become more difficult for companies to pass higher prices on to consumers, given the impact Covid restrictions have on customer demand. This translated into even lower jobs.

“Some companies, affected by the drop in orders, have laid off workers to cut costs,” said Wang Zhe, senior economist at Caixin Insight Group. The measure for employment in the service sector has been below 50 for four consecutive months, the survey showed.

The data came just hours after China reported a sharp drop in tourist spending for the national Labor Day holiday.

Tourist spending was just 64.7 billion yuan ($9.8 billion) during the five-day holiday, down 43% from the same period last year, according to a statement from the Ministry of Culture and Tourism on Wednesday.

People made 160 million domestic tourist trips over the holiday, down 30% from a year earlier.

The data again highlights how China’s zero Covid policy has heavily affected its economy.

“Recent mobility trends suggest that China’s pace of growth deteriorated significantly in April,” analysts at Fitch Ratings wrote on Tuesday. They expect GDP to contract in the second quarter, before production picks up in the second half.

Analysts at Nomura also warned last month of a growing risk of a “recession” in the second quarter, as lockdowns, a shrinking housing sector and slowing exports hit the economy hard.

As the highly transmissible Omicron variant spreads rapidly in China, the country is facing its worst outbreak in more than two years. So far, at least 27 Chinese cities are under full or partial lockdown, which could affect up to 185 million residents across the country.

This includes Shanghai – the country’s main financial hub and a major manufacturing and transportation hub. The city has been closed since March 28. Although authorities began lifting some restrictions last month, more than 8 million residents are still banned from leaving their residential complexes.

The Chinese government still adheres to its strict zero Covid policy more than two years after the initial outbreak – at a time when the rest of the world is learning to live with Covid. The policy involves mandatory mass testing and strict lockdowns to contain the spread of the virus.

But the economic costs are rising

Many economists have downgraded their China GDP growth targets for this year, citing risks from the zero Covid policy. Last month, the International Monetary Fund cut its growth forecast for China to 4.4%, well below the government’s official target of around 5.5%.

In recent days, Chinese leaders have repeatedly tried to reassure the public about how to fix the economy. President Xi Jinping last week called for a wave of infrastructure spending to promote growth. And the Communist Party’s Politburo on Friday pledged “specific measures” to support the internet economy.

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