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Title : China's August factory activity likely shrank amid COVID flare-ups, property crisis

Aug 29, 2022 01:30AM ET

BY: AnalysisWatch

Chinese factory activity probably contracted again in August, according to a report released on Monday, as COVID outbreaks and a struggling property sector hit demand, while power shortages in southwest China affected output.

The official manufacturing purchasing managers' index is expected to have risen to 49.2 in August from 49.0 in July, according to the median forecast of 23 economists polled by Reuters. The gauge is expected to fall below the 50-point mark that separates contraction from growth, reversing June's gains.

China's economy narrowly escaped contraction last quarter due to widespread COVID-19 blockages, and economists say its nascent recovery risks fading amid new virus outbreaks and a beleaguered property sector.

The tightening of COVID restrictions in August, as well as hot weather, may have also affected outdoor construction activity due to extreme heat and dragged down the services PMI, they added.

According to Iris Pang, ING's China economist, drought damage to the energy sector is around 1% of GDP. However, the "most worrying" aspect of the Chinese economy was the deleveraging reform of residential real estate developers, she said.

The real estate sector, which accounts for about a quarter of China's economy, has lurched from crisis to crisis since the summer of 2020 as a result of regulators' intervening to reduce excess leverage, causing some developers to default on their debts and struggle to complete projects.

Potential homebuyers are keeping an eye on whether unfinished homes can be completed quickly and to a good quality. "This takes time, at least a couple of quarters," Pang said.

To shore up the ailing economy, the central government offered another package of stimulus measures, including raising the quota for policy financing instruments by 300 billion yuan. The central bank also cut the benchmark lending rate and reduced the mortgage benchmark by a wider margin.

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