China’s factory activity unexpectedly contracted in October, suggesting the economy remains on uneven footing, underlining 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 pointed to encouraging signs of stabilizing in the world’s second-largest economy, supported by a flurry of policy support measures. However, a protracted property crisis and soft global demand remain significant headwinds.
The Purchasing Managers’ Index, or PMI, fell to 49.5 in October on a 100-point scale, down from 50.2 last month, according to the National Bureau of Statistics and the China Federation of Logistics & Purchasing.
A figure below 50 indicates a contraction in manufacturing activity, while a number above 50 reflects an expansion. It missed a forecast of 50.2 and was worse than the most pessimistic prediction of 49.9 by Standard Chartered in a Reuters poll.
The non-manufacturing PMI for October also fell 1.1 percentage points to 50.6, from 51.7 in September, a sign of slowing activity in China’s vast service and construction industries.
"The weak PMI data may reflect some of the weakness in demand related to the housing slump and a slowdown in infrastructure spending," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
"Although there are signs of exports bottoming out, a strong recovery in external demand is probably elusive," he added.
Both new export and import orders shrank for an eighth consecutive month, suggesting that manufacturers were struggling for buyers overseas and ordering fewer components used in finished goods for re-export.
Foreign buyers returned in force for the autumn round of the Canton Fair in Guangzhou, the world’s largest trade show, but Chinese sellers said orders remain low as Christmas nears, with few expecting global demand to recover soon.
"Given that PMI is a month-on-month indicator, the falling figure in October doesn’t reflect much of a change in demand but an adjustment in supply," said Dan Wang, chief economist at Hang Seng Bank China.
"Production in September was visibly better than in previous months due to improved domestic demand, which squeezed down industrial prices. In October, we saw a wider effort in the industrial sector to cut supply to cope with a profit squeeze."
The squeeze on business profits was underscored by factory gate prices contracting sharply this month, a sub-index in the PMI survey showed.
Prices of most nonferrous metals fell following the data release. China accounts for more than half of the global consumption of most base metals, which are widely used in the manufacturing sector.
In the currency market, the offshore yuan dropped after the PMI survey.
More support needed
Policymakers have since June unveiled a raft of measures after a rapid loss of economic momentum following a brief post-COVID-19 rebound, including modest interest rate cuts, increased cash injections and more aggressive fiscal stimulus.
But analysts say more policy support may be needed to ensure the economy reaches Beijing’s annual gross domestic product (GDP) growth target of about 5%.
Some government advisers are recommending that China lift its 2024 budget deficit target beyond the 3% of GDP set for this year, which would allow Beijing to issue more bonds to revive the economy.
HSBC on Monday said it believed the worst may be over for China’s shaky commercial real estate market, as a further $500 million charge from the sector dragged the bank’s third-quarter profits below forecasts.
Yet, the overall real estate industry, which accounts for almost a fourth of the country’s economic output, has shown few signs of turning a decisive corner since plunging into a debt crisis two years ago.
Data out this month showed China’s new home prices fell for a third straight month in September, a traditional peak home buying period, while property sales and investment extended double-digit declines. High youth unemployment, elevated debt levels and a weakened yuan complicate Beijing’s efforts to revive activity.
China’s top parliamentary body last week approved a 1 trillion yuan ($137 billion) sovereign bond issue in the fourth quarter. It passed a bill allowing local governments to front-load part of their 2024 bond quotas to support investment and economic growth.
Earlier this month, the central bank injected the biggest cash support since late 2020 via short-term policy loans to allow banks to extend credit as well as keep interest rates low.
"The additional 1 trillion yuan will help in November and December," Economist Intelligence Unit’s Xu said.