China's factories were hit harder this quarter than last year as Covid drags on, survey says

BEIJING — Manufacturing, one of the main drivers of China’s growth since the pandemic began, saw slower growth in the first quarter, according to an independent survey by China Beige Book.

It’s another sign that China’s economy may not benefit as much from overseas demand as Covid control policies diverge. China’s use of swift lockdowns in early 2020 helped the country quickly reopen businesses while much of the world struggled to contain the virus and resume normal business activity.

However, more countries have adopted a “live with Covid” strategy in the last several months. China has generally maintained a “zero-Covid” policy, although policymakers have tried targeted measures to keep ports or large factories running.

“Until recently, the China-during-Covid story has been heavy reliance on production and exports, even as consumers largely stayed home,” U.S.-based China Beige Book said in a report Tuesday. “This quarter highlights the potential limits of that reliance.”

The firm surveyed more than 4,300 businesses in China, mostly in the month through March 16. The report is an early look at the first quarter, which isn’t over yet, and only included proprietary trend analysis.

Retail businesses saw double-digit year-on-year declines in the rate of revenue and profit growth, as well as a slowdown in hiring, the China Beige Book survey found.

“Manufacturing is clearly in better shape but revenue, profit, and new domestic order growth are all slower than Q1-2021,” the report said.

Official figures from the National Bureau of Statistics of China released earlier this month showed surprisingly upbeat data for January and February, with faster-than-expected growth in retail sales, industrial production and fixed asset investment.

However, China’s exports grew by 16.3% in the first two months of the year from a year ago. That’s slower than the 29.9% growth in 2021.

Data for March and the first quarter are due out April 18.

“The core problem for manufacturers right now is soft domestic demand and the threat of additional Covid outbreaks, which could further derail growth,” Shehzad H. Qazi, managing director at the China Beige Book, said in an email. “Logistics companies are reporting a jump in their backlog of work, but there isn’t as yet any evidence of major supply chain logjams.”

Overall, the survey found that major government stimulus for the economy has yet to arrive, while the pace of borrowing fell to the lowest on record in the China Beige Book’s 10-year history.

On China’s struggling property sector, the survey found the industry was doing better than headlines might indicate, especially in China’s largest cities like Beijing and Shanghai.

“Accelerating profits say the sector is simply doing better than most observers realize,” the report said, without providing specific figures. “The housing market did fare worse than construction, with revenues and sales growth slowing despite better prices.”

The real estate sector and related industries account for about a quarter of China’s GDP, according to Moody’s. Developers like Evergrande have defaulted in the last several months as falling sales cut into the amount of cash companies have on hand to pay back investors on large levels of debt.

Economists have said the ultimate impact of Covid-related lockdowns — most recently in Shenzhen and Shanghai — depends on whether they last for two weeks or more than a month.

Last year, many economists also predicted a slowdown in exports last year, which did not materialize.

Even a forecast of slower export growth in March by Nomura’s chief China economist Ting Lu is a double-digit figure — a 14.1% year-on-year increase. He expects industrial production will rise by 4.5% in March from a year ago, slower than the 7.5% year-on-year pace reported for the first two months of the year.

For the full year, Lu predicts 4.3% growth in GDP, as of a report Monday. That’s below the “around 5.5%” target Beijing announced earlier this month.