By Gina Lee

Investing.com – China’s economic recovery from COVID-19 came under more pressure in August, with factory activity expanding at a slower pace and the services sector tumbling into contraction territory.

A recent COVID-19 outbreak, high raw material prices, a slowdown in exports, tighter measures to regulate property prices and a carbon emissions reduction campaign all contributed to weakening momentum for a strong recovery to date.

National Bureau of Statistics (NBS) data released earlier in the day showed that the manufacturing purchasing managers’ index (PMI) was at 50.1 in August. This was lower than the 50.2 in forecasts prepared by Investing.com as well as the previous month’s 50.4 figure.

The non-manufacturing PMI at 47.5, below the 50-mark indicating growth and below the previous month’s 53.3 reading.

"The worse-than-expected August PMIs add conviction to our view that the growth slowdown in the second half could be quite notable. We expect Beijing to maintain its policy combination of 'targeted tightening' for a few sectors, especially the property sector and high-polluting industries, complemented by 'universal easing' for the rest of the economy," Nomura analysts said in a note.

Other analysts also expect the People’s Bank of China (PBOC) to further cut the amount that cash banks must hold as reserves later in 2021 to lift growth. PBOC already cut the amount in July 2021, which released around CNY1 trillion yuan ($154.54 billion) in long-term liquidity into the economy.

The recent lockdowns that were implemented to curb the country’s latest COVID-19 outbreak also contributed to a steep fall in service sector activity.

"The latest surveys suggest that China's economy contracted (in August) as virus disruptions weighed heavily on services activity. Industry also continued to come off the boil as supply chain bottlenecks worsened and demand softened," Capital Economics senior China economist Julian Evans-Pritchard said in a note.

While most of the weakness should reverse with relaxing COVID-19 restrictions, tight credit conditions and weakening foreign demand will continue to weigh on China's economy, the note added.

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