Chinese factories slammed by virus in February, data shows

Asia’s two largest economies are exhibiting signs of a severe slowdown, with new data on Monday showing China’s factories were dealt a devastating blow in February as the coronavirus epidemic took hold and in Japan, investments in manufacturing tumbled in the fourth quarter of last year.

China’s private-sector Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) tumbled to 40.3 last month, the lowest level since the survey began in 2004. That is down sharply from the 51.1 reading in January and far below the 50-mark that separates growth from contraction.

The headline number was well off a Reuters poll forecast at 45.7 and even worse than the depths of the financial crisis in 2008-09, underlining the crippling effects of the virus across the country where authorities have imposed tough travel curbs and public health measures to contain the outbreak.

The findings, which focus mostly on small and export-oriented businesses, were backed by an equally grim official survey released on Saturday, which showed the steepest contraction on record.

Both the official and private surveys provide the first official snapshot of the state of China’s economy since the outbreak of the coronavirus epidemic which has killed more than 3,000 people globally, most of them in mainland China and infected about 80,000.

“China’s manufacturing economy was impacted by the epidemic last month. The supply and demand sides both weakened, supply chains became stagnant, and there was a big backlog of previous orders,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group said in comments on the survey.

The survey showed factory production and new orders collapsing to the worst levels on record, while employment also took a heavy blow. There was no respite for exporters either, with new export orders sinking at one of the sharpest rates in the series history.

The output gauge dived to 28.6 last month, from 52 in January, while that for new business plummeted to 34.9, from 51.9.

Fears for the global economy

The results underlined fears among global health authorities, policymakers and investors of a potential pandemic and its debilitating impact on the global economy. The anxiety sent financial markets into a tailspin last week with trillions of dollars wiped out of stocks.

In response to signs of the deepening economic damage, Beijing has rolled out a steady stream of support measures to help businesses stay afloat, especially small enterprises which are facing a severe cash crunch but are a key source of employment.

China’s central bank cut the benchmark lending rate last month to help lower financing costs and has said it would ensure ample liquidity through targeted reductions in banks’ reserve requirement ratios.

Those support measures have buoyed business confidence, the private survey found, with the degree of optimism reaching a five-year high.

But in the short run, analysts expect the epidemic to deal a sharp blow to growth with many forecasting a severe downturn in the first quarter.

Travel restrictions also affected the supply of labour, with firms struggling to fill roles in February, the survey showed, with factories shedding jobs at the quickest rate in the series history.

Economic growth in China slowed markedly to 6.1 percent last year, the weakest pace in nearly three 30 years, amid a bruising trade war with the United States and despite Beijing’s stimulus to boost sluggish investment and demand.

Meanwhile, Japan’s PMI showed its factory activity was hit by the sharpest contraction in nearly four years in February, reinforcing expectations the economy may have slipped into recession.

“Near-term prospects for Japan’s industrial sector appear very bleak,” said Joe Hayes, an economist at IHS Markit, which compiles the survey.

Japanese companies slashed spending on plant and equipment in the fourth quarter of last year, according to data also published on Monday.

Capital spending has been a bright spot in Japan’s fragile economy, the world’s third largest, driven by investment in urban development and labour-saving technology, automation and the hi-tech sector to cope with labour shortages in the ageing society.

Waning momentum

However, analysts said the momentum will wane as business confidence and appetite for investment are hurt by the coronavirus’ damaging effect on activity in China – Japan’s largest trading partner and the driver of global trade.

Capital spending slumped 3.5 percent in the last quarter from the same period a year earlier, weighed by slowing chip-making investment and weaker global demand for cars, Ministry of Finance (MOF) data showed on Monday. It was the first decline in 13 quarters, reversing from the prior quarter’s 7.1 percent gain.

On a seasonally adjusted basis, business expenditure declined 4.2 percent quarter-on-quarter in the October-December period, the data showed.

The data will be used to calculate revised gross domestic product (GDP) figures due on March 9, with some economists expecting a slight upward revision due to contribution from inventory while capital spending is set to be revised down.