China’s factories are still struggling with the energy crunch and supply woes
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A government survey of manufacturing activity released over the weekend fell for a second straight month, down to 49.2 in October from September’s 49.6. Any reading below 50 indicates contraction.
“It is clear that economic momentum is slowing quickly and supply chain pressures are compounding this weakness,” wrote Mitul Kotecha, chief emerging markets Asia and Europe strategist at TD Securities, in a Monday research note. “While we could see some relief for manufacturers in the months ahead, the supply crunch appears well entrenched.”
Economists at Capital Economics pointed out that an average of the two surveys still indicates that more firms are reporting a fall in activity than a rise, indicating that output overall has been constrained.
“Respondents to the surveys noted that reduced power supply, material shortages and high input costs held back output,” wrote Sheana Yue, assistant economist at Capital Economics in a Monday note.
As the cost of materials continues to rise worldwide, analysts expect supply bottlenecks to persist well into next year.
The Chinese government has taken steps to address some of the issues. Early last month, for example, China ordered coal mines to ramp up production, just months after ordering the opposite to rein in carbon emissions.
But analysts noted that those efforts aren’t providing immediate relief.
“The government’s strong measures to cap key coal price and boost coal production may take time to resolve the electricity shortage,” wrote Ken Cheung Kin Tai, chief Asian foreign exchange strategist at Mizuho.
An official index of non-manufacturing business activity, meanwhile, fell to 52.4 from September’s 53.2, indicating that consumer demand remains a concern, even if activity is still expanding.
Yue of Capital Economics wrote that flagging data in the services sector suggests that a rebound in consumer activity over the summer is starting to slow. The survey’s construction index also slipped, which Yue wrote “hints at a further pullback in property investment amid jitters over the financial health of Evergrande and other developers.”
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