December 8, 2023

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Factory activity in China unexpectedly contracted in October, dampening recovery momentum

Factory activity in China unexpectedly contracted in October, dampening recovery momentum
  • The Manufacturing PMI unexpectedly fell
  • The non-manufacturing PMI fell, with services and construction slowing
  • Metal and yuan prices decline abroad due to weak PMI
  • Analysts: The weakness of the global economy and the real estate crisis threaten growth

BEIJING, Oct 31 (Reuters) – China’s manufacturing activity unexpectedly contracted in October, highlighting the daunting task facing policymakers as they try to revitalize economic growth heading into the end of the year and 2024 amid multiple challenges at home and abroad.

Recent indicators have pointed to encouraging signs of stability in the world’s second-largest economy, supported by a wave of policy support measures, although the protracted property crisis and weak global demand remain major headwinds.

Data from the National Bureau of Statistics showed on Tuesday that the official purchasing managers’ index fell to 49.5 in October from 50.2, falling below the 50-point level that separates contraction from expansion. It missed Standard Chartered’s forecast of 50.2 and was worse than the more pessimistic forecast of 49.9 by Standard Chartered in a Reuters poll.

The non-manufacturing PMI also fell to 50.6 from 51.7 in September, indicating slowing activity in the broad services and construction sector.

Reuters graphics

“The weak PMI data may reflect some weakness in demand linked to the housing decline and slowdown in infrastructure spending,” said Xu Tianchen, chief economist at the Economist Intelligence Unit.

He added: “Although there are signs that exports are bottoming out, a strong recovery in external demand may be a long way off.”

Export orders and new imports contracted for the eighth straight month, indicating that manufacturers were struggling for buyers abroad and ordering fewer components used in finished goods for re-export.

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Foreign buyers returned strongly for the fall round of the Canton Fair in Guangzhou, the world’s largest trade fair, but Chinese sellers said orders were still low heading into Christmas, with few people expecting global demand to rebound soon.

“Given that the PMI is a monthly indicator, the lower number in October does not reflect so much a change in demand but an adjustment in supply,” said Dan Wang, chief economist at Hang Seng Bank China.

“Output in September was clearly better than in previous months due to improved domestic demand, which led to lower industrial prices. In October, we saw a broader effort in the industrial sector to reduce supply to deal with earnings pressure.”

A sub-index in the PMI survey showed that the pressure on corporate profits was highlighted by a sharp contraction in factory door prices this month.

A worker wearing a face mask works on a production line to make a steel rim for bicycles at a factory, as the country suffers from an outbreak of the new coronavirus, in Hangzhou, Zhejiang Province, China on March 2, 2020. China Daily via Reuters/File Photo Obtaining licensing rights

Prices of most non-ferrous metals fell after the release of the data. China accounts for more than half of global consumption of most base metals, which are widely used in the manufacturing sector.

In the currency market, the offshore yuan fell after the Purchasing Managers’ Index (PMI) survey.

More support is needed

Since June, policymakers have unveiled a range of measures after the rapid loss of economic momentum following a short post-Covid-19 recovery, including modest interest rate cuts, increased monetary injections, and more aggressive fiscal stimulus.

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But analysts say more political support may be needed to ensure the economy reaches Beijing’s annual GDP target of about 5%.

Some government advisers recommend China raise its budget deficit target for 2024 beyond the 3% of GDP set for this year, which would allow Beijing to issue more bonds to revive the economy.

HSBC said on Monday it believed the worst may be over for China’s fragile commercial property market, as an additional $500 million in charges from the sector left the bank’s third-quarter profit below expectations.

However, the real estate industry as a whole, which accounts for nearly a quarter of the country’s economic output, has shown little signs of a decisive turnaround since falling into the debt crisis two years ago.

Data released this month showed that new home prices in China fell for the third straight month in September, traditionally a peak period for home buying, while property sales and investment continued their double-digit declines. High youth unemployment rates, high debt levels and a weak yuan also complicate Beijing’s efforts to revive activity.

Last week, China’s highest parliamentary body approved the issuance of sovereign bonds worth one trillion yuan ($137 billion) in the fourth quarter, and approved a draft law allowing local governments to charge part of the 2024 bond shares to support investment and economic growth.

Earlier this month, the central bank injected its largest monetary support since late 2020 through short-term policy loans to allow banks to extend credit as well as keep interest rates low.

“The extra 1 trillion yuan will help in November and December,” said Xu of the Economist Intelligence Unit.

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Joe Cash reports. Edited by Sam Holmes and Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.

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Joe Cash reports on economic affairs in China, covering domestic fiscal and monetary policy, key economic indicators, trade relations, and China’s growing engagement with developing countries. Before joining Reuters, he worked on UK and EU trade policy in the Asia-Pacific region. Joe studied Chinese at Oxford University and speaks Mandarin.