By Ambar Warrick 

-- Chinese manufacturing activity shrank in August, a private survey showed on Thursday, as COVID lockdowns and a drought-driven energy crunch weighed on industrial activity. 

The Caixin manufacturing purchasing managers index (PMI) read 49.5 for August, compared with July’s reading of 50.4. Analysts expected a reading of 50.2. A reading below 50 indicates contraction. 

Thursday’s reading comes largely in line with a government report on Wednesday, which showed that manufacturing activity shrank for a second straight month in August. The official PMI read 49.94 in August. But Caixin had shown a mild expansion in July's manufacturing reading, in contrast to government data. 

The Caixin survey differs from the official one in the type and number of companies surveyed. Caixin surveys a smaller sample size of mainly small, private companies, while the government has a much bigger sample size, and surveys larger, mostly state-owned enterprises. 

Thursday’s data confirms that a mid-year recovery in China’s manufacturing sector was short-lived, and that the country has to contend with a severe slowdown in industrial activity.

While China lifted strict COVID lockdowns in most of its cities, practices such as regular testing and localized quarantines have lingered, disrupting economic activity.

A major drought in the Sichuan province also caused power shortages in several industrial areas, further denting manufacturing activity over the past two months. 

“Right now, the economy is still slowly recovering from a widespread outbreak of Covid-19 in the first half of the year. Yet, local flare-ups and the punishing heat wave have disrupted the trend and created new downward pressures, posing a threat to the recovery,” said Wang Zhe, Senior Economist at Caixin Insight Group.

Still, Zhe noted that supply chains improved through the month, and that market sentiment also remained optimistic.

China has unveiled a slew of stimulus packages to shore up growth, after the economy barely avoided a contraction in the June quarter. Weakness in the manufacturing sector also appears to have spilled over into services, which are a key driver of growth.