China factory index hits record low on coronavirus
Manufacturing activity plunges while US signals interest rate cut could be on the cards
Manufacturing activity in China plunged in February as the coronavirus took hold, the latest data revealed, while in the US the Federal Reserve has signalled interest rates could be cut in response to the “evolving risks” to the economy from the outbreak. The manufacturing purchasing managers’ index, one of the first official economic indicators published since the coronavirus outbreak, fell to 35.7 this month, an all-time low and down from 50 in January, China’s National Bureau of Statistics announced on Saturday. A figure below 50 indicates a contraction in activity compared with the previous month, as judged by the managers who fill in the PMI survey. Separately Fed chair Jay Powell issued a statement during trading in New York on Friday afternoon saying that the central bank would “act as appropriate” to support growth. This helped the S&P 500 pare earlier losses to close down 0.8 per cent after being down as much as 3 per cent. That brought its loss for the week to 11 per cent. The 10-year Treasury note, which touched a low of 1.114 per cent following Mr Powell’s remarks, settled at 1.16 per cent on Friday as investors grew increasingly confident that the central bank would cut rates at least twice this year. Mr Powell has used the phrase “act as appropriate” in the past to signal willingness to use monetary policy to support growth.
The collapse in China’s manufacturing activity, which exceeded its collapse during the global financial crisis of 2008, shows the severity of the problem faced by President Xi Jinping in restarting the world’s second-largest economy. Last weekend, Mr Xi told local officials that low-risk areas should “resume full production and normal life”. “Today’s PMI data suggest that things are really bad, and the government is willing to report that,” wrote Larry Hu of Macquarie Capital in an analyst note. Mr Hu warned that gross domestic product growth in the first quarter would be worse than the consensus forecast of about 4 per cent year-on-year. He added the government might even report a contraction for the quarter, which would be the first time since the Cultural Revolution.
February’s PMI reading was the lowest since January 2005, when the index was first released. The previous lowest was 38.8 in November 2008, during the financial crisis. Local officials face two conflicting objectives. They must control the outbreak, which has killed 2,835 people in China, and also get the country back to work after the extended lunar new year holidays, when most of the migrant workers upon whom China’s factories depend return to their rural homes. While the NBS announced that medium-to-large sized enterprises had a “work resumption rate” of 78.9 per cent, banking group ANZ said they were probably operating well below this in terms of capacity utilisation. Based on migration data, ANZ said the Chinese economy was operating at 20 per cent capacity, with about 50 per cent of workers back at their posts as of this weekend. The new export orders sub-index dropped to 28.7, down 20 points from the previous month, because of cancelled and delayed orders as a result of the coronavirus, said Zhao Qinghe, NBS senior statistician. Mr Zhao added that the work resumption rate was rising rapidly, and would lead to an increase in the PMI for March.
Although some city governments have chartered planes, trains and buses to get their rural migrant workers back to the cities, many are unwilling or unable to return due to quarantines and roadblocks imposed by other local governments afraid of contagion. Apple has issued a revenue warning because of the outbreak. Its contractor Foxconn assembles iPhones and other Apple products in China. Foxconn’s biggest iPhone plant has struggled to return to full production because of housing problems for workers in need of quarantine. Foxconn and other manufacturers often house workers on-site in large dormitories. Separately, Taiwan on Saturday reported a cluster of infections in a hospital, the most significant instance of local spread of the disease since the epidemic began. The infections brought Taiwan’s count of confirmed cases to 39. The hospital cluster raises concerns that Taiwan could face a mass outbreak such as in South Korea and Italy, which Taipei has so far avoided by taking strict and decisive measures. Iran on Saturday reported nine new deaths, bringing its total to 43. It has recorded 593 individuals testing positive for the disease so far. The outbreak, which began about 10 days ago in Qom, a holy city 140km south of Tehran with a population of 1.2m, has spread almost to all the country. Additional reporting by Jennifer Ablan and Peter Wells in New York and Monavar Khalaj in Tehran