China’s Services Sector in Doldrums as Covid-19 Lockdowns Bite

Separately, a survey of almost 400 European businesses operating in China found that just under a quarter were reconsidering their investment plans, as the country’s zero-tolerance approach to battling the virus hit their supply chains, staffing and revenue.

Economists say that without an easing of the government’s strict approach to smothering even small outbreaks with mass quarantines for those infected and stay-at-home orders for everyone else, the economy could shrink in the second quarter for the first time since the pandemic struck in early 2020.

On Thursday, China reported 4,848 locally transmitted new Covid-19 cases for the day earlier, with 4,466 of those logged in Shanghai and 50 in Beijing. There were 13 deaths linked to the disease, all in Shanghai.

Services-sector activity tumbled in April at its steepest rate since Covid-19 shut down the city of Wuhan in February 2020, according to an index published by Caixin Media Co. and research company IHS Markit.

The index dropped to 36.2 in April from 42.0 in March as the Covid-19 restrictions spread from city to city, closing businesses and throttling consumer demand for eating out, shopping and other services. A reading above 50 indicates expansion and below 50 points to a contraction. The index sank to a record low of 26.5 in February 2020.

New business orders and exports both fell sharply, while staffing levels dropped for the fourth straight month. Firms cut prices to win what new business they could find, according to the survey.

The deterioration in the services sector offers another glimpse into the growing economic costs of China’s tough approach to the Omicron variant of the coronavirus, which put the entire northeastern province of Jilin and dozens of cities—including Shanghai, a bustling financial hub of 25 million people—under weeks of lockdown.

Official gauges of activity in manufacturing and services, published Saturday, recorded similarly steep drops as restrictions took hold. Factory production slowed or in some cases ground to a halt in regions under lockdown.

A second survey, also published Thursday by the European Union Chamber of Commerce in China, found that 23% of firms surveyed were considering shifting current or planned investment from China in response to its Covid-19 policies—the highest percentage recorded since 2012 and more than double the proportion considering such a shift at the start of 2022.

Among respondents, 60% said they expect revenue for the year to be below prelockdown projections, with 92% saying they have been hit by supply-chain disruptions as public-health restrictions have shut factories and severely disrupted transportation.

“The predictability of the Chinese market has gone,” Jörg Wuttke, president of the EU chamber, told a news conference, adding that he hopes the survey will spur Chinese officials to spell out the exit ramp from their zero-tolerance approach.

The survey was conducted in late April and polled 372 member businesses.

—Bingyan Wang contributed to this article.

Write to Jason Douglas at [email protected]