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China PMI February 2020

China: Manufacturing PMI nosedives to all-time low in February due to coronavirus

The manufacturing Purchasing Managers’ Index (PMI) published by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP) plummeted from January’s 50.0% to 35.7% in February. The print was well below the 45.0% expected by market analysts. As a result, the index fell well below the 50.0% threshold that separates contraction from expansion in the manufacturing sector, with February’s reading representing the lowest print on record.

February’s print reflected much lower readings for all the sub-components, with new orders and production leading the pack. Export orders also slumped significantly.

February’s dismal performance reflects the spread of the coronavirus, which has halted operations in large swaths of the country and also disrupted supply chains. Although authorities reported that, as of 25 February 25, 78.9% of the companies surveyed had returned to work, the manufacturing PMI could remain depressed in March. As highlighted by Iris Pang, Greater China economist at ING:

“Even if China’s factory production can recover in March, it will still face the risk of a low level of export orders. This is because the supply chain will continue to be broken, this time in South Korea, Japan, Europe, and the US, where Covid-19 has begun to spread. Exports will, therefore, continue to be weak in 1Q20 and even into 2Q20.”

Yi David Wang, head of China economics at Credit Suisse, added that the main factor to watch is the shortage in labor:

“We repeat that the key near term uncertainty facing the Chinese economy is when labor input can be restored to the pre-outbreak norm. The fact that PMIs, trade, FAI, retail sales will eventually display V-shape rebounds is irrelevant at this point. Instead, we need to be wary of the rising probability that the supply-side shock from labor input reduction might trigger a new round of negative demand shock even after the virus is contained. Such a scenario can even lead to an increase to China’s natural rate of unemployment.”

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