Falling factory activity in China is a sign of coming economic hardship

BEIJING (Reuters) – Chinese factory activity contracted more than expected in October to contract for a second month, affected by still high commodity prices and weaker domestic demand, indicating heightened economic concern in the last quarter of 2021.

FILE PHOTO: A worker wearing a face mask works on a production line making steel rims for bicycles at a factory, as the country is hit by the novel coronavirus outbreak, in Hangzhou, Zhejiang province, China, on March 2, 2020. China Daily via REUTERS / File photo

The official manufacturing purchasing managers index (PMI) was 49.2 in October, down from 49.6 in September, data from the National Bureau of Statistics (NBS) showed on Sunday.

The 50 point mark separates growth from contraction. Analysts expected it to hit 49.7.

China’s sprawling manufacturing sector has steadily slowed this year, with output in September increasing at its slowest pace since March 2020 due to environmental restrictions, power rationing and rising commodity prices.

In line with the weaker overall PMI, a sub-index for production slipped to 48.4 in October from 49.5 in September. A sub-index for new orders also contracted for a third month, standing at 48.8.

“About a third of the companies surveyed cited insufficient demand as their biggest challenge, indicating that inadequate demand had restricted production,” said Zhang Liqun, analyst at the China Logistics Information Center.

Even more worryingly, a producer price sub-index rose to 61.1, the highest since 2016, when the statistics bureau started releasing the indicator, suggesting rising inflationary pressures as the broad economic growth is slowing down.

“The production index fell to its lowest level since its publication in 2005, excluding a period of the global financial crisis in 2008/09 and the COVID epidemic in February 2020,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

“The producer price index is at its highest level since its release in 2016. These signals confirm that the Chinese economy is probably already going through stagflation.”

POLICY HOLD

Factory exit inflation hit a record last month amid soaring commodity prices, but weak demand has capped consumer inflation, forcing policymakers to tread a tightrope between supporting the economy and increasing producer prices.

Analysts polled by Reuters expect the People’s Bank of China to refrain from trying to stimulate the economy by reducing the amount of liquidity banks must hold in reserve until the first quarter of 2022.

“Production remains low, indicating that the demand problem may be relatively large and that some policy easing is still needed,” said Zhou Hao, senior economist at Commerzbank.

The official non-manufacturing PMI in October edged down to 52.4 from 53.2 in September, when services returned to expansion at the end of a COVID-laden summer.

New clusters of COVID-19 returned in October, particularly in the north, which could disrupt economic activity again and deal a further blow to the service sector due to strict restrictions to contain the disease.

“Due to the impact of the epidemic and the weather, consumers were more likely to vacation at home or travel short distances,” Zhao Qinghe, senior statistician of NBS, said in a statement.

While the transportation sector, including air and rail services, has grown, growth has been relatively weak, Zhao said.

China’s official October composite PMI, which includes both manufacturing and services activity, stood at 50.8, down from 51.7 in September.

Reporting by Ryan Woo and Gabriel Crossley; Editing by William Mallard and Richard Pullin

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