China Factory Activity Slows In August As Flooding Hits Business

Factory activity in China slipped slightly in August, according to official data published Monday, as the country grappled with the fallout from widespread floods.

The closely watched Purchasing Managers' Index (PMI) is a key gauge of manufacturing activity in the world's second-largest economy, which has largely bounced back after plunging in February due to dramatic coronavirus measures.

But in August, that rebound slowed a little with the PMI inching down to 51.0 from 51.1 in the previous month.

Zhao Qinghe, a senior statistician at the National Bureau of Statistics (NBS), said heavy rains and floods had hit the business and production of companies in Sichuan and southwestern China.

Nomura economists had warned earlier this month that while there was likely to be strong recovery among high-tech industries in August, resurgent flooding in mid-August "could impact both production and demand along the Yangtze River".

China has been hit by very severe floods this summer, affecting millions of people, washing away roads and forcing the closure of some tourist sites and transport links.

The August PMI was also below analyst expectations reflected in a Bloomberg poll, which forecast a climb to 51.2.

Any figure above the 50-point mark represents growth rather than contraction.

In February, the index plunged to 35.7 points after the coronavirus brought much of China to a standstill.

Zhao said that demand was continuing to recover and exports are "gradually improving".

"Business expectations have improved and corporate confidence has increased," he said.

Non-manufacturing PMI came in at 55.2 points -- up from 54.2 in July and slightly better than expected by analysts, who had predicted a flat level throughout the month.

"This could be due to the strong demand for cross-provincial leisure trips as families spend summer holidays within mainland China because overseas travel restrictions remain mostly unchanged," said Iris Pang, chief economist for Greater China at ING.

She added that until the coronavirus situation eases overseas and China relaxes its travel restrictions, the country will rely more on domestic spending for economic growth.

PMI for small companies, however, was down to 47.7 points, down on the previous month and still in contraction territory.

"This month, over 50 percent of small companies reported insufficient market demand and over 40 percent reported capital shortage, and their production and operation still face many difficulties," Zhao added.

Analysts were broadly positive about the outlook.

"It's not too surprising that the manufacturing PMI has started to level off since growth in industry has already returned to its pre-virus level," said Julian Evans-Pritchard, senior China economist at Capital Economics.

"But with fiscal support on course to be stepped up further in the coming months, we still think there is some further upside to industrial activity."