China Covid Outbreak Hits Spending With More Damage to Come

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China's services sector took a massive knock in March from the nation's worst Covid outbreak since the start of the pandemic, with latest holiday spending figures showing there's more damage to come this month.

The Caixin China Services Purchasing Managers Index fell to 42 in March from 50.2 in February, the lowest level since the depths of the 2020 lockdown after the initial outbreak in Wuhan. The reading was below the 50-mark that separates expansion from contraction and well below the 49.7 median estimate in a survey of economists.

Spending over the just-ended Qingming festival break, a traditional Chinese holiday where people usually visit the tombs of their ancestors, point to weak data for April as well. Domestic tourism revenue over the three-day period plunged 31% from a year ago, while delivery of packages and cinema box office sales also declined.

The Caixin index painted an even bleaker picture than China's official non-manufacturing purchasing managers index, which fell to 48.4 from February's 51.6. The official survey tracks larger companies and includes the construction sector, while the Caixin survey focuses more on smaller businesses.

“Both supply and demand in the services sector contracted sharply after the latest wave of Covid outbreaks started to take off in early March,” said Wang Zhe, a senior economist at Caixin Insight Group. “Businesses grew less optimistic,” he said, with the sub-index for planned future activity hitting a 19-month low in March.

The gauge for new business dropped to the weakest level since March 2020 while the one for new export business fell to the lowest since October 2020, according to a statement from Caixin and S&P Global on Wednesday.

Lockdowns and other restrictions to curb the spread of Covid-19 show spending is still well below pre-pandemic levels. Tourism revenue over the three-day national holiday that ended Tuesday was only about 39% of the level reached during the same period in 2019, data from the Ministry of Culture and Tourism showed.

A total of 17.5 million visits to funeral and cemetery service organizations were logged during the break, down 74% from last year, according to data from the Ministry of Civil Affairs. Many people shifted to the internet to pay their respects to their ancestors, with the number of online worships nearly tripling to 21.6 million, the figures showed.

As a result, the number of workers employed in related sectors during the period dropped 15% on year to 1.03 million, according to the ministry.

Separate data from the Ministry of Transport showed around 53.8 million trips were made by rail, road, waterways and air during the holiday, down 62.7% from a year ago and 9.8% from the same period in 2020.

The number of packages delivered by the postal industry likely fell 12.8% year-on-year to 690 million during the holiday, the State Post Bureau said in a statement. Box office sales totaled 122 million yuan ($19.2 million), about one-seventh of the 822 million yuan recorded in the comparable period last year, according to data provided by ticketing company Maoyan.

With assistance from Bloomberg