China factory activity shrinks in October, spurring calls for more state support
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China's official manufacturing PMI dropped to 49.5 in October from 50.2 in September.
PHOTO: AFP
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SHANGHAI – China’s factory activity fell back into contraction in October, while an expansion of the services sector unexpectedly eased, signalling that the economy remains fragile and in need of support.
The official manufacturing purchasing managers’ index (PMI) dropped to 49.5 this month from 50.2 in September,
The non-manufacturing gauge, which measures activity in the construction and services sectors, declined to 50.6 from 51.7, lower than the forecast of 52. The 50-point threshold separates growth from contraction.
The weaker-than-expected data bolstered calls for additional stimulus from Beijing, after the government in October announced more support for the economy, including issuing extra sovereign debt
China’s post-reopening recovery in 2023 has been challenged by weak consumer confidence, falling export demand and an ongoing property crisis.
“Given the downside surprise, the authorities will still need to deliver growth-supportive policy,” said ANZ Greater China chief economist Raymond Yeung.
The data weighed on regional currencies. The offshore renminbi weakened about 0.1 per cent following the release before steadying. The Australian dollar fell 0.2 per cent. Chinese shares also declined, with those listed in Hong Kong losing as much as 1.7 per cent.
The mainland’s benchmark CSI 300 Index dropped 0.8 per cent. Bonds rallied, with China’s 10-year government note yield falling two basis points to 2.7 per cent.
Pinpoint Asset Management chief economist Zhang Zhiwei said the government could raise the fiscal deficit for 2024 to drive a more sustained economic recovery. The weak PMI reinforces the case for stronger support, he said, adding that policies in the property sector need to be fine-tuned.
The People’s Bank of China may cut the amount of cash that lenders must hold as reserves, known as the reserve requirement ratio, in the coming weeks to help fund government bond sales. It also has an opportunity to cut the interest rate on its one-year policy loans and add further liquidity in mid-November, as 850 billion yuan (S$160 billion) of the medium-term lending facility is set to mature.
The PMI numbers partly reflect seasonal factors due to an eight-day holiday at the beginning of October, but it also shows market demand remains weak. The new orders indexes under the manufacturing and non-manufacturing PMIs were both below the 50-point mark, indicating a contraction in demand.
“Part of the decline was due to seasonality, but it was still somewhat disappointing after taking into account that,” said Ms Michelle Lam, Greater China economist at Societe Generale.
“It shows that the recovery remains fragile, and the reopening recovery could be coming to an end after the holiday season.”
The number of travellers during the Golden Week holiday picked up from pre-pandemic levels, but tourism revenue only nudged past that of 2019. This indicates that consumers are still cautious with spending as job and income prospects remain bleak.
The boost from holiday spending was also offset by softening activity in other services sectors. NBS senior statistician Zhao Qinghe highlighted capital market services and real estate as the main drags. As a result, services PMI fell to 50.1 from 50.9.
A contraction in export demand for manufacturing, measured by the new export order index, deepened in October, indicating that factories that sell to overseas markets are still under pressure.
“China’s economic activity fell to an extent, and the foundation for a continued recovery still needs to be further solidified,” the NBS statistician said in a statement accompanying the data release. BLOOMBERG
