China’s manufacturing sector is back up and running, but is the demand ready for the supply? Felix Thompson reports.


As the Chinese government moved to contain the spread of the coronavirus in the early months of the year, manufacturing activity in the country plummeted to historic lows.

Factories were forced to temporarily shut or significantly wind down activity as partial or full lockdowns were rolled out in provinces across China in late January and February, putting more than half a billion people under containment measures.

As a direct consequence, the headline Caixin Purchasing Managers Index (PMI) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – fell to its lowest ever level.

The 40.3 reading from February, which took into account the responses from purchasing managers at Chinese companies on five aspects of their firm’s activity, including output, new orders and employment, fell more than 10 points from January’s headline PMI of 51.1.

“Production, new work and staffing levels all fell at the quickest rates since the survey began nearly 16 years ago,” IHS Markit, which compiles the Caixin PMI, noted in its report.

In Q2, however, there are signs that the manufacturing sector is finally getting back on its feet. In May, for instance, PMI manufacturing output surged, expanding at its fastest rate in nearly a decade.

This drove Caixin’s headline PMI reading up to 50.7 for the month, taking it above the threshold between contraction and expansion for the first time since January.

One sector to have particularly cranked up production in recent months is the automotive industry, says Arjen van Dijkhuizen, a senior economist at ABN Amro, in a recent blog post.

Automotive manufacturers were acutely hit by the introduction of travel restrictions and lockdown measures at the start of 2020, with production for February falling by more than 80%, when compared with the year before.

With firms around the world hugely reliant on parts and components made in China, factories in other countries were soon hit as well.

Hyundai was the first to announce in early February that it had been forced to temporarily shutter factories in South Korea due to a shortage of parts from China. Just days later, Nissan paused production at its factory in Japan.

According to van Dijkhuizen, the sector has since staged a comeback in China, and is “shaping” the country’s post-Covid-19 industrial rebound.

After registering positive annual growth of 11.33% year-on-year in May, he says that car production is improving at an “impressive pace” from February’s trough of -83% year-on-year.

Other sectors that aren’t as established in the Hubei region – the epicentre of the outbreak and where stringent lockdown rules were imposed – were less affected by China’s lockdown measures, Kanika Thakur, Citi’s head of trade finance for Asia Pacific tells GTR.

“Particular parts of China were obviously more impacted, such as Wuhan, which is an auto hub. But if, for example, a semiconductor or tech company had a manufacturing plant in southern China which was not impacted, then as long as their workers got back from the Chinese New Year holidays, and were able to produce, they went back to normal relatively quickly,” she says.

Meanwhile, other industries have seen a boom in output during the Covid-19 crisis as demand for their products has soared. IHS Markit’s chief economist for Asia Pacific, Rajiv Biswas, tells GTR that Chinese production of high-technology goods grew at 8.9% year-on-year in May.

This is due in part to the rise in demand for products such as electronic goods, laptops and mobile phones, as people around the world found themselves forced to set up offices at home.

China was the world’s biggest exporter of personal protective products before Covid-19 struck, and in 2019 was a major exporter of ventilators and respirators.

With governments the world over in desperate need of such items, as they bid to limit infection rates and save lives, China has continued to ship sizeable amounts of these goods abroad.

From March 1 to April 4, for instance, it exported US$1.4bn-worth of major epidemic prevention materials, including nearly 4 billion face masks and 16,000 ventilators.


A recovery in Chinese exports?

With China’s manufacturers back producing, China’s foreign trade levels seem to have rebounded from dire times in January and February, which saw exports plunge by 17.2% for the two months combined.

PJ Bain, CEO at working capital fintech firm PrimeRevenue, says in a recent blog post that the company’s data show that the Chinese economy is coming back online and trade is starting to normalise.

By looking at the overall value of invoices recorded on its supply chain finance platform for suppliers across 20 territories in China and in many industries serving Western customers, Bain notes that trade activity between Chinese suppliers and their customers began normalising in early March.

Export statistics also point to a sudden burst in trade coming out of China, with stats from the Organisation of Economic Co-operation and Development (OECD) showing that merchandise exports rose 3.7% in April and were nearly back to 2019 levels.

Another potential indication of a bounce back in Chinese trade is a recovery in the trade finance sector. Citi’s Thakur says that the bank has seen demand return for trade finance after an initial drop.

“In January, coinciding with Chinese New Year, which is a bit of a slow period anyway for that part of the world, we did begin to see slight moderation in activity,” she says. “We saw lower demand in our supply chain programmes, borrowing requirements, as well as lower transactional flows, whether it be letters of credit, collection documents, etc.”

This, she says, has changed as trade picks back up. “I think we have bottomed out in China. As an example, what we’re beginning to see with our supply chain programmes is anchor buyers trying to expand these programmes to get more suppliers included, and suppliers are showing a greater interest because it provides them with an alternative source of sustained financing,” Thakur says.


Export challenges

While China’s manufacturers may be up and running again, and trade is showing signs of recovery, there are lingering concerns that foreign demand won’t be able to match the jump in output.

New export orders dropped at a “historically sharp” rate in May, IHS Markit notes in its Caixin PMI.

Meanwhile, despite exports bouncing back to near pre-coronavirus levels in April, in May they saw another contraction of 3.3% on the back of weak demand from the US and Europe, which make up over 30% of China’s exports.

Both of these key markets have seen their economies ravaged by coronavirus containment measures, with the Federal Reserve stating in June that it expects the US economy to contract by 6.5%.

In Europe, the picture isn’t any better, with the European Commission forecasting the continent’s economy will shrink by 7.4% this year.

Iris Pang, ING’s chief economist for Greater China, says the sizeable impacts on economies in the West will hurt Chinese exports in the coming months, especially for key export products like smartphones.

“Global demand is weak, as demonstrated by high unemployment levels in the US, UK and European economies,” Pang explains in a May 31 blog post.

She adds that even as lockdowns are relaxed in some major cities, the jobs markets in these countries are unlikely to be able to digest the high levels of short-term unemployment.

Such a weakening in demand is likely to limit China’s economic recovery, with exports still accounting for around one-fifth of its economy, despite Beijing’s attempts at reducing its reliance on foreign trade in recent years.

In an economic assessment released in April, credit insurer Coface’s Asia Pacific economist Carlos Casanova notes that the lack of demand from the US and Europe will drag on activity in the second and third quarters.

Meanwhile Chinese exporters will also have to contend with the continuing effects of ongoing US-China trade tensions and the shifting of supply chains out of the country, which some say coronavirus has only sped up.

In a recent report on the impact of Covid-19 on supply chains in Asia Pacific, Biswas notes that manufacturing supply chains will be reshaped in the medium term.

“For many multinationals worldwide, significant supply chain vulnerabilities have been exposed by the protracted disruption of industrial production in China,” he says.

Governments have already started re-evaluating supply chains for critical medical equipment and key pharmaceutical products, for instance, with Japan launching a ¥23.5bn (US$220mn) subsidy programme to encourage domestic manufacturers to diversify their supply chains away from China.

As all these issues play out, banks are waiting to see if the immediate increase can be sustained.

Sriram Muthukrishnan, global head of trade product management at DBS, tells GTR that while the good news is that manufacturing is back up to around 80%, unease remains around trade tensions with the West and subdued demand.

Because of this, Muthukrishnan still has “real concern” that there will be an impact on ongoing exports and that some Chinese firms will ultimately be forced to sell to buyers closer to home. “We do believe that the local consumption in China will start becoming a greater factor,” he adds.