China factory activity unexpectedly shrinks in Oct, dents recovery momentum

BEIJING (Reuters) – China’s manufacturing activity unexpectedly contracted in October, an official factory survey showed on Tuesday, underlining the challenge facing policymakers trying to engineer a durable economic recovery.

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

The official purchasing managers’ index (PMI) fell to 49.5 in October from 50.2, dipping back below the 50-point level demarcating contraction from expansion, and missing a forecast of 50.2, data from the National Bureau of Statistics showed.

The non-manufacturing PMI also fell to 50.6 last from 51.7 in September, indicating a slowdown in activity in the vast service sector and construction.

“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 imports orders shrank for an eight consecutive month, suggesting that manufacturers were struggling for buyers overseas and ordering fewer components used in finished goods for re-export.

“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.”

Policymakers have since June unveiled a raft of measures to shore up growth, 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 growth target of about 5%.

Nomura, JPMorgan and Moody’s Analytics all upgraded their 2023 growth outlook, following the rosier-than-expected third quarter data.

China’s top parliamentary body last week approved a 1 trillion yuan ($137 billion) sovereign bond issue in the fourth quarter, and passed a bill allowing local governments to front load part of their 2024 bond quotas to support investment and economic growth.

And 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.

(Reporting by Joe Cash. Editing by Sam Holmes and Shri Navaratnam)