China Economy

China's factory activity slumps in February to weakest reading on record, private survey shows

Key Points
  • The Caixin/Markit Manufacturing Purchasing Managers' Index showed China's factory activity contracted in February, coming in at a record low of 40.3.
  • Analysts polled by Reuters had expected the Caixin/Markit PMI to come in at 45.7.
  • On Saturday, the official manufacturing PMI from China's statistics bureau showed February manufacturing activity in China shrank to 35.7 — the fastest pace on record.

A private survey showed China's manufacturing activity slumped in February, as the coronavirus outbreak hit the world's second largest economy.

On Monday, the Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) came in at 40.3 for February — the lowest reading since the survey was launched in early 2004.

"China's manufacturing economy was impacted by the epidemic last month," said Zhengsheng Zhong, chief economist at CEBM Group, a Caixin subsidiary. "The supply and demand sides both weakened, supply chains became stagnant, and there was a big backlog of previous orders," he said in a press release.

Economists polled by Reuters had expected it to come in at 45.7. January's reading came in at 51.1.

PMI readings above 50 indicate expansion, while those below that level signal contraction.

The numbers come as China continues to grapple with the fast-spreading coronavirus outbreak that has killed more than 2,900 people and infected at least 80,000 others in the mainland. The virus has spread to some 60 countries around the world, but most of those infected and died were from China.

The disease, formally known as COVID-19, has severely impacted business activity in the mainland as the government locked down cities for weeks and enforced wide-scale quarantines to contain its spread.

"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," said Zhong.

The gauge for new export orders remained in negative territory and slumped to its lowest point since January 2009, Zhong said.

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On Saturday, the official manufacturing PMI from China's statistics bureau showed February manufacturing activity in China shrank to 35.7 — the fastest pace on record.

The private manufacturing PMI survey by Caixin/Markit features a bigger mix of small- and medium-sized firms. In comparison, the official PMI survey typically polls a large proportion of big businesses and state-owned companies.

Sian Fenner, lead economist at Oxford Economics, said the market has been anticipating the "terrible number," as the virus is expected to have a short-lived, strong impact on China's economy.

"We do see some destruction, that's bound to happen in this situation, but at lot of this is deferrals as well," Fenner told CNBC.

She said she expected a strong rebound in China's growth from the second quarter of 2020 going into the second half of the year.

But not everyone is as sanguine.

The slump may be worse that it looks, said Julian Evans-Pritchard, senior China economist at Capital Economics.

"Despite their sharp declines, the headline indices actually understate the recent weakness," said Evans-Pritchard in a note on Monday.

While the Caixin/Markit survey showed business confidence improving — with the gauge for future output expectations hitting a five-year high — that may take some time to play out, he added.

"The only silver lining is that firms are the most convinced in years that future output will rebound. That's perhaps not surprising given how bad current conditions are," he said. But "with the jump in virus cases overseas, there is a growing risk of a protracted downturn in foreign demand. The likelihood of a quick V-shaped recovery in the coming months is falling fast," Evans-Pritchard said.