China’s factories are still recovering, but Covid-19 pains linger

This was the second consecutive month that the reading was above 50, a level indicating expansion rather than contraction.

The official index of non-manufacturing business activity rose to 52.7 in December from 52.3 in November, in a sign that the services sector continued to recover as well.

China continued its recovery this year after avoiding a recession in 2020. However, the world’s second-largest economy faces a headache that could seriously affect growth in 2022, from recurring Covid-19 outbreaks to supply chain disruptions and an ongoing property crisis.

Economists expect growth of about 7.8% this year, but 2022 is a different story, with major banks slashing their growth forecasts to between 4.9% and 5.5%. This would be the second slowest growth rate since 1990, when the country’s economy increased by 3.9% after international sanctions related to the Tiananmen Square massacre in 1989. China’s economy grew by 2.2% in 2020.

Ongoing real estate problems continue to destabilize the economy. Cash-strapped real estate developers, such as the massive Evergrande conglomerate, have shed jobs and offloaded assets to stay afloat — a major concern, given that the sector accounts for nearly a third of China’s gross domestic product. Just this week Evergrande said it was making progress with plans to deliver new properties this month, but the stock rattled after another debt deadline passed with no signs that the company had met its commitments.
There are also constant threats to factory production. Two of the world’s largest chip makers – Samsung (SSNLF) and Micron – this week warned that the Covid-19 outbreak and a strict lockdown in China’s main industrial hub in Xi’an are hampering their operations.

The two companies said they had to adjust operations in the city, which is experiencing one of the worst outbreaks of the epidemic in the community in China. The authorities have responded by enacting comprehensive measures at a intensity and on a scale rarely seen since Wuhan, the original epicenter of the epidemic.

American chip maker micron (MICR) He noted that the shutdown of Xian could affect the production of DRAM memory chips, which are used in computers, as the company had to reduce its workforce at the site.

Samsung – which has invested more than $10 billion in Xi’an, and employs more than 3,300 people there – said it had had to “temporarily adjust operations” in the city. It added that it plans to take “all necessary measures, including leveraging our global manufacturing network, to ensure that our customers are not affected.”

Any production slowdown from the city threatens to exacerbate a global chip shortage, an ongoing crisis that has limited supply of everything from iPhones to new cars.

– Diksha Madhok and Laura He contributed to this report.

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