China's factory, service sectors shake off 3 months of lockdown pain

China's factory and service sectors snapped three months of activity decline in June, business surveys showed on Thursday, as authorities lifted a strict Covid lockdown in Shanghai, reviving output and consumer spending.

The official manufacturing purchasing managers' index (PMI) rose to 50.2 in June from 49.6 in May, the National Bureau of Statistics (NBS) said.

That slightly missed the forecast for 50.5 in a Reuters poll but rose above the 50-point mark that separates contraction from growth for the first time since February.

While activity has sped up since various Covid lockdowns imposed since March have been rolled back, headwinds persist, including a still subdued property market, soft consumer spending and fear of any recurring waves of infections.

"Today's NBS numbers were encouraging to see, even if manufacturing slightly underwhelmed and expectations were for an improvement given the easing of lockdown restrictions," said Matt Simpson, senior market analyst at City Index.

Investors cheered the signs of economic recovery with China's major stock indices rallying more than 1% and set for their biggest monthly rise in nearly two years.

A sub-index for production stood at 52.8, the highest since March 2021, while new orders also returned to expansionary territory for the first time in four months, although growth remained weak.

"Even though the manufacturing sector continued to recover this month, 49.3% of the companies reported orders were insufficient," said Zhu Hong, senior statistician at NBS. "Soft market demand is still the main problem facing the manufacturing industry."

"Some firms have faced a squeeze in their profit margins, and relatively huge operating difficulties," Zhu added.

The factory hub of Shenzhen was shut for a week in March while Shanghai, located at the heart of the Yangtze River Delta manufacturing area, was put under a strict lockdown for about two months before curbs were lifted on 1 June.

An Amcham China survey showed on Thursday supply chains received some relief in June, with fewer companies reporting Covid disruptions but an overwhelming 98% of firms in the poll still experiencing a negative impact from Covid on their business.

Analysts expect further improvement in economic conditions in the third quarter, although the official GDP target of around 5.5% for this year will be hard to achieve unless the government abandons the zero-Covid strategy.

"This surge of economic activities will likely keep the momentum into July, as further relaxation of mobility restriction takes place," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

"Nonetheless, China is sticking to the zero-Covid policy stance. I think this means the economic growth will likely stay below its potential before the policy is further relaxed."

The government said this week that it would slash Covid-19 quarantine requirements for international travellers and removed an indication of travel through Covid-hit cities on a state-mandated mobile app for its citizens, paving way for greater exchanges of people and goods.

However, President Xi Jinping defended the zero-Covid policy on Tuesday, saying China is willing to accept some temporary impact on economic development over harm to people's health.

STRONG SERVICES REBOUND

The official non-manufacturing PMI in June improved to 54.7 from 47.8 in May.

The services industry staged an impressive rebound, the fastest in 13 months, with sectors that were hard hit by Covid curbs such as retail and road transport catching up with previously depressed demand.

However, social distancing rules such as those on restaurant dining were still in place in Shanghai throughout June.

A index for construction activity also rose to 56.6 from 52.2.

In order to stabilise growth and rein in unemployment, China's State Council recently announced a broad package of economic support measures and Premier Li Keqiang vowed to achieve reasonable economic growth in the second quarter.

China's official composite PMI, which includes both manufacturing and services activity, stood at 54.1, compared with 48.4 in May.

However, some analysts doubt the momentum can be sustained over the medium to long-term.

"The PMI employment indices continue to point to weakness in the labour market, suggesting that household finances and consumer confidence remain fragile," said Julian Evans-Pritchard, senior China economist at Capital Economics.

"Once the reopening boost fades, this will weigh on any further recovery. And compared to 2020, the economy will benefit from fewer tailwinds from export demand and policy stimulus."