By Gina Lee

Investing.com – Chinese factory activity dropped at the fastest pace in two years in March 2022. Production and demand fell sharply thanks to the latest COVID-19 outbreaks and the economic impact of Russia’s invasion of Ukraine on Feb. 24.

The Caixin manufacturing purchasing managers index (PMI) was 48.1, the steepest rate of contraction since February 2020. Forecasts prepared by Investing.com predicted a figure of 50, while the previous month’s reading was 50.4. The 50-point index mark separates growth from contraction.

National Bureau of Statistics data from the day before showed that the manufacturing PMI was 49.5 and the non-manufacturing PMI was 48.4.

"The average of the two PMIs is now under 50, and apart from the initial pandemic hit in 2020, is now at its lowest since February 2016," Capital Economics China economist Sheana Yue told Reuters.

"Given the composition of the firms surveyed, the sharper reduction in the Caixin reading suggests the deterioration was more significant among smaller private firms and exporters."

Domestic and overseas demand has also weakened markedly, with a decline in new export orders accelerating in March. The latest COVID-19 outbreaks in China, disruptions in the shipping sector, and greater market uncertainties from the Ukraine crisis led customers to cancel or suspend orders, said the surveyed companies.

Several factories also blamed tight global supply chains for higher prices, and the war in Ukraine also contributed to input cost inflation hitting a five-month high.

The COVID-19 outbreaks in cities like Shanghai and Shenzhen, and the ensuing lockdowns, add to the risk of a sharp slowdown in the economy. The State Council has already pledged to roll out policies to stabilize the economy, it said at a meeting on Wednesday.

"The prospect of the war between Russia and Ukraine is uncertain, and the commodity market convulsed," Caixin Insight Group senior economist Wang Zhe said in a statement accompanying the data release.

"A variety of factors resonate, aggravating the downward pressure on China's economy and underscoring the risk of stagflation."

Wang also called for more help for vulnerable groups and small businesses, noting the government must strike a balance between maintaining normal production and public health and safety.

The sole bright spot in the survey was the employment index, which expanded for the first time in eight months. Factories ramped up production as the government discouraged Lunar New Year travel due to COVID-19.