China’s factories are still struggling with power shortages and supply problems

A government survey of manufacturing activity released over the weekend fell for the second month in a row, to 49.2 in October from 49.6 in September. Any reading below 50 indicates shrinkage.

Manufacturing in China has been affected by a handful of problems, including a power crunch, shipping delays and inventory increases.

“It is clear that economic momentum is slowing rapidly and supply chain pressures are compounding this weakness,” Mitul Kotecha, chief emerging markets strategist for Asia and Europe at TD Securities, wrote in a research note on Monday. “While we could see some relief for manufacturers in the coming months, the supply shortage appears to be well established.”

The global shipping crisis has created chaos around the world, with many major companies recently acknowledging that clogged ports, missing parts, and higher costs are hurting businesses. It’s a concern that will weigh on the final quarter of the year, a critical holiday season for many retailers.
Not all of the data from China has been bad. A private survey of factory data conducted Monday by media group Caixin, which focuses more on small and medium-sized companies, showed an increase from 50 in September to 50.6 in October. Caixin attributed the recovery in its index to recovering domestic demand, but noted that energy shortages and raw materials shortages have affected supply.

Economists at Capital Economics noted that an average of the two surveys still indicates that more companies are reporting a drop in activity than an increase, indicating that overall production has been limited.

“Respondents noted that reduced power supply, material shortages and high input costs held back production,” Sheana Yue, an assistant economist at Capital Economics, wrote in a note Monday.

As the cost of materials continues to rise around the world, analysts expect supply bottlenecks to persist well into next year.

The Chinese government has taken steps to address some of the problems. Early last month, for example, China ordered coal mines to increase production, just months after ordering otherwise to control carbon emissions.

But analysts noted that those efforts do not provide immediate relief.

“Strong government measures to limit the key price of coal and boost coal production may take time to resolve the electricity shortage,” wrote Ken Cheung Kin Tai, Asia’s chief currency strategist at Mizuho.

Meanwhile, an official index of non-manufacturing business activity fell to 52.4 from 53.2 in September, indicating that consumer demand remains a concern, even if activity is still expanding.

Yue of Capital Economics wrote that declining data in the services sector suggests that a rebound in consumer activity over the summer is beginning to slow. The survey’s construction index also fell, which Yue wrote “hints at a new setback in real estate investment amid concerns about the financial health of Evergrande and other developers.”

“We suspect that the hard data in the coming weeks will show that the recovery in services activity faltered last month,” Yue added, noting the re-imposition of restrictions as China tries to contain a coronavirus outbreak. The country has stood firm to a strict “Covid zero“We continue to expect mediocre economic growth in the coming quarters.”

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