China’s manufacturing activity surprisingly contracts in October, ‘bumpy road’ ahead for economy
- Official manufacturing purchasing managers’ index fell to 49.5 in October, down from 50.2 in September
- The non-manufacturing PMI stood at 50.6 in October, compared to 51.7 in September
A pivotal gauge of China’s manufacturing activity reported a surprising contraction in October, the product of a high baseline for the previous month and ongoing jitters over the state of the country’s property market.
The unforeseen dip, analysts said, shows enduring uncertainty over the country’s economic recovery and adds credence to persistent calls for greater policy support.
Meanwhile, the non-manufacturing PMI stood at 50.6 in October, compared to 51.7 in September.
The readings were lower than market expectations, with the average economist’s estimate from Chinese data provider Wind predicting a slight fall to 50.1 but still staying in the expansionary range. A PMI higher than 50 typically indicates expansion of activity, while an index below 50 denotes a contraction for the period surveyed.
“The unexpected decline of manufacturing PMI shows recovery in China is a bumpy road, as domestic demand is still quite weak,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
“I think the government is likely to raise the fiscal deficit next year and aim for a sustained economic recovery.
“Meanwhile, the policies in the property sector need to be fine-tuned to avoid further damage to the economy.”
The official composite PMI, which includes both manufacturing and services, fell to 50.7, down from 52 in September.
Zhao also pointed to an early release of demand in September before the holiday, which resulted in a high base.
Within official manufacturing PMI, the new-orders subindex dropped to 49.5, from 50.5 a month earlier, while the new-export-orders subindex fell to 46.8 from 47.8 in September.
For non-manufacturing PMI, the construction subindex, partly affected by the ongoing property crisis, stood at 53.5, down from 56.2 in September.
Xu Tianchen, an economist with The Economist Intelligence Unit, played down concerns over the PMI readings as they would be propped up by water conservancy projects funded by last week’s issuance of sovereign bonds.
“But it’s an indication that weak property construction is still holding back the economy, while a quick rebound in exports seems elusive,” he added.
China only needs economic growth of 4.4 per cent in the fourth quarter, year on year, to achieve the annual goal, the statistics bureau said earlier this month, which is seen to be relatively easy considering last year’s low comparison base.
The new bond issuance signalled a more proactive fiscal policy stance, observers said.
China, though, still faces headwinds as confidence among investors and consumers remain weak both at home and abroad.
The real estate market also remains a major drag on the economy, while further deteriorating financial difficulties faced by local governments continue to pose risks to China’s fiscal stability.
“The latest surveys suggest that pockets of weakness remain across the economy. Encouragingly, policy looks set to remain supportive over the coming months,” said economists at Capital Economics, citing last week’s budget adjustment, nationwide property easing measures, as well as a likely resumption of rate cuts.
“But if the October data released next month are similarly weak, more will need to be done to ensure the recovery doesn’t slide backwards. Failing which, our expectation for a modest reacceleration in growth over the coming quarters might prove too optimistic.”