China's factory recovery moderates as higher costs slow business

© Reuters. Worker wearing a face mask works on a production line manufacturing bicycle steel rim at a factory in Hangzhou, Zhejiang

By Gabriel Crossley

BEIJING (Reuters) -China’s factory activity expanded in December as hot export demand fueled a recovery in the world’s second-largest economy from the coronavirus slump, although higher labour and transport costs slowed the pace of growth.

The official manufacturing Purchasing Manager’s Index (PMI) fell to 51.9 in December from 52.1 in November, data from the National Bureau of Statistics (NBS) showed on Thursday.

The index remained above the 50-point mark that separates growth from contraction but was a tad below the 52.0 in a Reuters’ poll of analysts.

China’s vast industrial sector has staged an impressive recovery from the coronavirus shock thanks to surprisingly strong exports. The economy is expected to expand around 2% for the full year – the weakest pace in over three decades but much stronger than other major economies still struggling to contain infections.

However, tougher coronavirus control measures in many of its key trading partners in the west and recent domestic infections could dent industrial demand, weighing on the recovery.

The official PMI, which largely focuses on big and state-owned firms, showed the sub-index for new export orders stood at 51.3 in December, easing from 51.5 a month earlier.

But an index for factory prices rose strongly, reflecting solid overseas demand as well as increased shipping costs, even though some export markets are under lockdown, said Iris Pang, chief economist for Greater China at ING.

Economic indicators ranging from trade to producer prices all suggest a further pickup in the industrial sector.

A sub-index for small business activity stood at 48.8 in December, sharply down from November’s 50.1 and returning to contraction.

Zhao Qinghe, an official at the NBS, said in a statement accompanying the data release that small businesses were pressured by higher labour, raw material and distribution costs.

“Small manufacturers also suffer from the problem of hiring labour as the service sector in China is competing for workers,” said Pang.

A sub-index for employment in the official PMI stood at 49.6 in December, slightly up from November’s 49.5.

China has also seen strong improvement in retail sales driven by firm demand for autos and communication equipment.

In the services sector, activity expanded for the 10th straight month, albeit at a somewhat slower clip. An indicator for construction activity rose at a faster pace.

Ahead of China’s peak travel season, the capital Beijing imposed lockdowns on some COVID-infected areas, the first since the last coronavirus outbreak in the months of June and July.

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