BEIJING (Reuters) – Chinese factory activity extended the decline in August as new COVID infections, the worst heat waves in decades and a struggling property sector weighed on output, suggesting the economy will struggle to maintain momentum.

The official purchasing managers’ index (PMI) for the manufacturing sector fell from 49.0 in July to 49.4 in August, the National Bureau of Statistics (BNS) announced on Wednesday.

While the PMI slightly beat expectations of 49.2 in a Reuters poll of analysts, it remained below the 50-point mark that separates contraction from growth for the second month in a row, suggesting prolonged weakness in the sector.

The survey shows the world’s second-largest economy struggling to emerge from the sluggish growth seen in the June quarter, with risks clouding the outlook as high inflation and the war in Ukraine hit external demand.

“Official PMIs show further loss of economic momentum this month as the stimulus has faded and the housing slowdown has deepened,” said Julian Evans-Pritchard, China economist at Capital Economics, in a note. “We continue to believe that the economy will struggle to grow over the next few months.”

Raymond Yeung, chief economist for Greater China at ANZ, cut his gross domestic product forecast for 2022 to 3.0% from 4.0% as demand weakened.

He also expects business to be disrupted due to tighter virus checks ahead of the Communist Party Congress in October.

The production sub-index remained unchanged but is still in contraction territory as production is disrupted by a power crisis, while the new orders sub-index rose 0.7 points.

The new export orders index rose from 47.4 to 48.1, indicating a slowdown in momentum.

In particular, smaller manufacturers, which are less equipped to mitigate COVID-related disruptions than their larger counterparts, came under greater pressure in August with their PMI down 0.3 points.

The return of tighter COVID restrictions in August, as new cases were reported, suggests Beijing has no immediate plans to relax its broad zero COVID policy, analysts say.

According to Evans-Pritchard, 41 cities, accounting for 32% of China’s GDP, are currently in the midst of outbreaks, the highest since April, when sweeping lockdowns severely hurt the economy.

Extreme heat and drought have also prompted some regions such as southwestern Sichuan province and neighboring Chongqing to halt industrial production to ensure power supplies to residences, disrupting the operations of well-known manufacturers like Taiwan’s Foxconn and the battery giant CATL.

Some construction work was also suspended due to the heat, pushing the official non-manufacturing PMI in August down to 52.6 from July’s 53.8.

The official composite PMI, which combines the manufacturing and services sectors, fell to 51.7 from 52.5 the previous month.

However, supportive government policy should offset weak domestic demand and help bolster confidence, said Bruce Pang, chief economist at Jones Lang Lasalle.

“With the heat waves easing and policy support from the government, factory and service activity is expected to expand in the coming months.”

China’s economy slowed sharply in the second quarter as widespread COVID lockdowns weighed on demand and business activity, while the property market swung from crisis to crisis.

To revive the economy, the central government last week proposed another stimulus package, increasing the quota on policy finance tools by 300 billion yuan ($43.37 billion).

The central bank also cut benchmark lending rates and lowered the mortgage benchmark by a larger margin.

But risks abound as youth unemployment hits a record high while rising domestic consumer inflation has weighed on further policy easing measures.

Economists also warn that weaker external demand could dampen Chinese exports, which supported growth in the first half, offsetting sluggish consumption.

($1 = 6.9177 Chinese Yuan)

(Reporting by Ellen Zhang and Ryan Woo; Editing by Sam Holmes)

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