China’s factory activity expands at a slower pace in February, misses expectations

China’s factory activity expanded in February at a slower pace than a month earlier, hitting the lowest level since last May and missing market expectations after brief COVID-19-related disruptions earlier in the year.

The official manufacturing Purchasing Manager’s Index (PMI) fell to 50.6 from 51.3 in January, data from the National Bureau of Statistics (NBS) showed on Sunday, remaining above the 50-point mark that separates growth from contraction.

Analysts had expected it to decline to 51.1.

Chinese factory activity normally goes dormant during the Lunar New Year break as workers return to their home towns. This year, the government appealed to workers to remain local to curb the spread of COVID-19.

Generally, China’s economic recovery has been gathering pace due to robust exports, pent-up demand and government stimulus.

The official PMI, which largely focuses on big and state-owned firms, showed the sub-index for new export orders was 48.8 in February compared with 50.2 in January, slipping back into contraction after months boosted by overseas demand.

A sub-index for activity among small firms stood at 48.3 in February versus 49.4 a month earlier. Smaller firms were more affected by the seasonal effects of the Lunar New Year, said Zhao Qinghe, an official with the NBS in comments released with the data.

A sub-index for employment in the official PMI stood at 48.1 in February, down from January’s 48.4 as firms laid off more workers and at a faster pace.

Still, some manufacturing sector firms are seeing increasing pressure from rising labor costs and a shortage of workers, said Zhao.

China’s factory gate prices rose on year in January for the first time in a year, as months of strong manufacturing growth pushed raw material costs higher.

China eked out 2.3% economic growth last year. This year, the government may avoid setting a growth target for fear of provincial economies feeling pressured to take on more debt, policy sources previously told Reuters.

China will reinforce policy support for foreign trade and ensure the smooth operation of supply chains, its new commerce minister said earlier this week.

In the services sector, activity expanded for the 11th consecutive month but at the slowest pace in a year.