Date: Tuesday, October 31st, 2023
China’s factory activity fell back into contraction in October, while an expansion of the services sector unexpectedly eased, signaling that the economy remains fragile and is in need of support.
The official manufacturing purchasing managers’ index slipped to 49.5 this month from 50.2 in September, according to a statement from the National Bureau of Statistics on Tuesday. That compares with an estimate of 50.2 in a Bloomberg survey of economists.
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 level separates growth from contraction.
The weaker-than-expected data bolstered calls for additional stimulus from Beijing, after the government this month announced more support for the economy, including issuing extra sovereign debt and raising the budget deficit ratio. China’s post-reopening recovery this year 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 Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.
The data weighed on regional currencies. The offshore yuan weakened about 0.1% following the release before steadying. The Australian dollar fell 0.2%. Chinese shares also declined, with those listed in Hong Kong losing as much as 1.7%. The mainland’s benchmark CSI 300 Index dropped 0.8%. Bonds rallied, with China’s 10-year government note yield falling 2 basis points to 2.70%.
What Bloomberg Economics Says ...
“The soft readings suggest weak momentum at the end of the third quarter carried into early 4Q23. The upshot — these warning signs are likely to spur the government to press ahead with its campaign to bolster stimulus and support the economy. We expect the central bank to cut rates further before the year is up.”
— Chang Shu, chief Asia economist
Zhang Zhiwei, chief economist at Pinpoint Asset Management Co., 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 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 ($116 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 Michelle Lam, Greater China economist at Societe Generale SA. “It shows that the recovery remains fragile, and the reopening recovery could be coming to an end after the holiday season.”
The number of travelers during the Golden Week holiday picked up from pre-pandemic levels, but tourism revenue only nudged past that in 2019. This indicates 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 drag. 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 this month, indicating 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,” Zhao said in a statement accompanying the data release.