Factory activity contracted in China in December, according to a private survey, highlighting the economic costs of the country’s abrupt abandonment of its strict zero Covid regime as it grapples with a nationwide wave of infections.

The Caixin Purchasing Managers’ Index, a special measure of operating conditions in China’s manufacturing sector, showed a reading on Tuesday of 49 for December, its lowest since September and down from 49.4 in November.

Official PMI data in China, released over the weekend, showed a sharp drop in economic activity. The manufacturing and services measures came in at 47 and 41.6 respectively, both falling to their lowest levels since early 2020 at the start of the Covid-19 pandemic. A reading below 50 indicates contraction, while a reading above 50 indicates expansion.

China’s economy, which until recently was severely strained from restrictions designed to keep the virus at bay, is now struggling. The effect of sudden reopening And the outbreak of the disease in major cities.

as many as possible Hundreds of millions of people may have been infected With COVID by late December, according to internal government estimates, just weeks after authorities began easing President Xi Jinping’s anti-COVID measures.

In Beijing and other major cities, hospitals have been overwhelmed by a wave of elderly and frail patients Supplies of fever medicine and antivirals sold out.

Carlos Casanova, chief economist at UBP in Hong Kong, suggested that while pandemic restrictions were an initial drag on growth in the fourth quarter, the “explosion in Covid cases” was the most important factor in the weak PMI data.

“The main message from the PMI data is that the wave of reopenings has proven very disruptive,” said Julian Evans-Pritchard, chief China economist at Capital Economics. “The market’s euphoria from the shift away from type zero Covid has overlooked how disruptive the shift has been.”

The virus will be officially downgraded on January 8, when international arrivals will no longer be required to quarantine.

Weak manufacturing activity in December – which marked the fifth consecutive month of declines for the Caixin Manufacturing PMI – followed a prolonged period of economic fragility. Other metrics, including retail sales, an important measure of consumption, also deteriorated at the end of 2022.

China’s CSI 300 index of shares listed in Shanghai and Shenzhen has fallen 1.5 percent over the past month, although it has risen in the past week since announcing the end of Covid zero.

China’s economy It is set to miss its 5.5 percent annual growth target for 2022 — already the lowest in decades — as economists polled by Bloomberg had forecast full-year growth of just 3 percent.

In addition to the wave of Covid infections, policymakers are grappling with a real estate crisis that has weighed on the economy for more than a year. As well as slowing exportsthat supported growth during the early stages of the pandemic.

However, the Caixin survey bore little silver lining to the outlook for the economy, with plant managers reporting increased confidence for the coming year as the rapid spread of cases fueled expectations after the peak of the wave had passed.

“It’s almost certain by February that things will get over the worst and start to pick up,” Evans-Pritchard said.

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Foreign news broadcasts show horrific footage of Chinese hospitals full of coronavirus patients. Nearly half of the passengers on recent flights from China to Milan have tested positive. The Chinese economy is itself sick, correspondingly. As a result, banks will bear a heavy financial burden.

Data suggests that Beijing’s sudden reversal of its restrictive policies regarding the non-spread of the COVID-19 virus caused this to happen. ruin Worse than the widespread lockdowns. Chinese factory activity contracted in December at its sharpest pace in nearly three years. The non-manufacturing index, which measures construction and services sector activity, fell to 41.6 from 46.7 in the previous month. This was well below the 50-point mark that separates contraction from growth.

Chinese health authorities estimate that 250 million people, or about 18 percent of the population, contracted the virus in the first few weeks of December. The real percentage should be closer to the numbers reported by Italian health officials monitoring flights from Beijing.

This points to a severe labor shortage and supply chain disruption. Manufacturing will continue to slow and companies’ financial distress will rise.

The real estate sector is already in deep trouble. Real estate prices and sales volumes were falling amid slowing consumer demand. The retail and entertainment sectors are also exposed. They would normally expect $110 billion in sales during the Lunar New Year holiday. This year, injuries were the only surge that mattered.

Outside of the real estate business, most major companies have the ability to weather the storm. Small businesses are more at risk. Chinese authorities expect big banks to support troubled companies with soft loans and outright bailouts. Local developers and regional banks are among the previous recipients.

Non-performing loans to Chinese banks had already reached a record high of 3 trillion renminbi ($436 billion) by the middle of last year. Beijing asked major lenders to step in to prop up the housing market with another Rmb1.9 trillion last year. It is increasingly being leveraged in other sectors. China’s debt as a percentage of GDP reached a historic record in the first half.

Shares of the largest banks, including Bank of China, Agricultural Bank of China and China Construction Bank, have fallen in the past six months. China’s largest industrial and commercial bank is down by a tenth and trades at 0.4 times that of tangible books – less than half the price of foreign peers such as HSBC. China’s economic recovery will come at the expense of domestic lenders and their shareholders.