Production in China Declines at Record Pace in February due to Coronavirus - Caixin China General Manufacturing PMI
Efforts to contain the recent outbreak of the coronavirus in mainland China weighed heavily on manufacturing sector performance in February. Production, new work and staffing levels all fell at the quickest rates since the survey began nearly 16 years ago as companies extended their usual Lunar New Year shutdowns to help stem the spread of the virus. Supply chains were also hit heavily, with average delivery times increasing at the quickest pace on record, leading firms to increase their use of current stocks. However, firms anticipate a recovery in production over the next year due to expectations that production will be ramped up once any coronavirus-related restrictions are lifted. Notably, the degree of positive sentiment was the strongest seen for five years. At 40.3 in February, the headline seasonally adjusted Purchasing Managers Index fell from 51.1 at the start of the year to signal a renewed decline in the health of the sector. Furthermore, it was the lowest PMI reading since the survey began in April 2004.
Key findings
Record falls in output, new orders and employment
Travel restrictions lead to sharp deterioration in supply chains
Business confidence rises on hopes of output recovering
Production fell sharply during February as many firms shutdown or was operating below capacity due to restrictions put in place in response to the coronavirus outbreak. The rate of contraction was the quickest on record, and ended a six-month period of rising output.
The total amount of new work received by Chinese manufacturers also declined at the steepest rate since the survey began in early 2004. The drop in sales was the first seen since June 2019, with companies widely linking the fall to the coronavirus and subsequent factory closures. Meanwhile, the level of new export work fell at one of the fastest rates in the series history, which was in turn attributed to shipping restrictions and order cancellations.
Lower production requirements drove the steepest decline in buying activity since the survey began nearly 16 years ago. At the same time, firms struggled to get hold of inputs, as travel restrictions and company shutdowns led to the quickest deterioration in vendor performance on record.
Difficulties in sourcing inputs contributed to the steepest decline in inventories of purchased items for just over 11 years. Concurrently, stocks of finished goods fell for the second month in a row, albeit only slightly.
Travel restrictions also impacted the supply of labour, with firms struggling to fill roles in February. Notably, employment across the manufacturing sector fell at the quickest rate in the series history. As a result, firms registered greater pressure on capacity, with backlogs rising sharply.
Cost pressures were meanwhile subdued, with average input prices rising only modestly in February. However, factory gate prices fell for the first time in three months due to efforts to boost sales.
Encouragingly, manufacturers were confident that output would rise over the next year, with the degree of optimism reaching a five-year high. Firms widely expect production to rebound once restrictions related to the virus are lifted.
Dr Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group said “The Caixin China General Manufacturing PMI slid to 40.3 in February, weaker than 40.9 in November 2008 amid the global financial crisis. This month’s gauge hit the lowest level since the survey launched in early 2004. The sharp decline was due to stagnant economic activity ocross the country disrupted by the pneumonia epidemic caused by a novel coronavirus. The supply and demand sides of the manufacturing sector were both weak.”
1) Both the subindexes for output and total new orders plummeted into contractionary territory and hit their lowest levels on record. Supply chains came to a standstill as businesses extended the Lunar New Year holiday and multiple local governments implemented restrictions on transportation and the movement of people in efforts to control the epidemic. The gauge for new export orders remained in negative territory and slumped to the lowest point since January 2009.
2) There was a large backlog of previously accumulated orders due to stagnant supply chains. While both the subindexes for employment and suppliers’ delivery times remained in negative territory and dropped to record lows, the gauge for backlogs of work remained in positive territory, to highlight the strongest rise since April 2005. Manufacturers were faced with great pressure to deliver orders with insufficient operational capacity amid the impact of the epidemic. While the gauge for stocks of purchased items fell to its lowest point since January 2009, the one for inventories of finished goods rebounded slightly, indicating that both the supply and demand sides were stagnant Both gauges remained in contractionary territory.
3) Industrial product prices dropped slightly. While the measure for output prices fell into negative territory, the one for input costs remained in positive territory despite a small drop. Companies have been under pressure to cut prices in the face of declining demand. Pressure on costs of raw materials remained large, but it was no longer a major problem.
4) That said, business confidence continued to improve, with the gauge for future output expectations hitting a five-year high. This was due chiefly to more-proactive macroeconomic policies and policymakers’ support for small and midsized enterprises.
He said “China’s manufacturing economy was impacted by the epidemic last month. The supply and demand sides both weakened, supply chains become stagnant, and there was a big backlog of previous orders. However, manufacturers were more confident The economy will be able to see a significant rebound when the epidemic is gradually contained and companies accelerate the resumption of business amid more-proactive fiscal and monetary policies. ”
Source : Strategic Research Institute