China’s factories are still struggling with the energy crunch and supply woes

China’s factories are still struggling with the energy crunch and supply woes

China’s big factories just had their worst month since the Covid-19 pandemic began, underscoring the scale of the slowdown in the world’s second largest economy and the supply challenges facing their customers.

A government survey of manufacturing activity released over the weekend fell for a second straight month, down to 49.2 in October from September’s 49.6. Any reading below 50 indicates contraction. Manufacturing in China has been battered by a handful of problems, including an energy crunch, shipping delays and rising inventories.

“It is clear that economic momentum is slowing quickly and supply chain pressures are compounding this weakness,” wrote Mitul Kotecha, chief emerging markets Asia and Europe strategist at TD Securities, in a Monday research note. “While we could see some relief for manufacturers in the months ahead, the supply crunch appears well entrenched.” The global shipping crisis has created chaos worldwide, with many major companies recently acknowledging that clogged ports, missing parts and higher costs are hurting business. It’s a concern that will weigh on the final quarter of the year, a critical holiday season for many retailers.

Not all of the data out of China has been bad. A private survey of factory data on Monday from media group Caixin, which focuses more on smaller and medium-sized companies, showed an increase from 50 in September to 50.6 in October. Caixin attributed the pickup in its index to recovering domestic demand, but noted that the power crunch and a shortage of raw materials has hurt supply. Economists at Capital Economics pointed out that an average of the two surveys still indicates that more firms are reporting a fall in activity than a rise, indicating that output overall has been constrained.

“Respondents to the surveys noted that reduced power supply, material shortages and high input costs held back output,” wrote Sheana Yue, assistant economist at Capital Economics in a Monday note. As the cost of materials continues to rise worldwide, analysts expect supply bottlenecks to persist well into next year. The Chinese government has taken steps to address some of the issues. Early last month, for example, China ordered coal mines to ramp up production, just months after ordering the opposite to rein in carbon emissions.