Factory Activity Returns in China

Manufacturing activity in China rebounded in May, driven by a jump in output as companies resumed production after the country’s COVID-19 lockdown.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives a snapshot of the country’s manufacturing sector, rose to 50.7 from 49.4 in April. A number above 50 signals an expansion in activity, while a reading below that indicates a contraction.

The PMI reading is the highest since January, when COVID-19 first spread in China. This was driven by a sharp increase in output as companies got back to work and cleared outstanding orders. Supply chains also steadied after massive disruptions early in the year.

“Supply was generally stronger than demand in the manufacturing sector, as production continued its expansion amid a broader economic rebound while demand had yet to recover,” Wang Zhe, senior economist at Caixin Insight Group, said in the PMI report. “Sluggish exports remained a big drag on demand as the virus continued spreading overseas.”

Despite this, demand remains weak. With many of China’s trading partners deep in lockdowns of their own, new export orders remained firmly in contractionary territory, although the drop was not as sharp as in April. Consumers have also remained cautious amid job losses and fears of a fresh wave of infections.

China’s economy shrank 6.8 percent in the first quarter from a year earlier, the first contraction since quarterly records began. Highlighting the uncertain outlook, the government said in late May it was not setting an annual growth target for the first time since 2002.

In other regions, manufacturing activity remains weak. Japan’s factory activity shrank at the fastest pace since 2009 in May, while South Korea also saw manufacturing slump at the sharpest pace in more than a decade. Taiwan’s manufacturing activity also fell in May. Vietnam, Malaysia and the Philippines saw PMIs rebound from April, though the indices all remained below the 50-mark threshold that separates contraction from expansion.