China Factory Activity Slows in October

Chinese economic activity showed evidence of softness this month, cooling from a more than five-year high reported ahead of the Communist Party congress.

The official manufacturing purchasing managers index, a gauge of China’s factory activity, fell to 51.6 in October from 52.4 in September, data showed Tuesday. The reading was slightly below the median forecast of 51.8 by economists polled by The Wall Street Journal.

Tuesday’s data, an early peek at the economy’s performance in October, came as interest rates in the bond market rose across the board this week, adding pressure on companies already struggling to service their debt.

Chinese stocks remained lower after a significant decline Monday, with shares hit by liquidity concerns. Following Tuesday’s data, China’s bond market saw a rebound in prices, which move inversely to yields, reflecting the market’s expectations that softer economic growth could lead to an easing in monetary policy.

Ahead of the party congress concluded last week, economic activity had ramped up, boosted by external demand as well as stimulus measures. Higher commodity prices also supported business sentiment; in October, that optimism faded somewhat.

Officials attributed the slowdown to the Golden Week holiday, which disrupted production and curbed orders, but economists say rising borrowing costs and waning effects of government support for economic growth may have started to weigh on businesses.

“September’s spike was a real surprise and this month’s pullback seems to be more like a normal reading,” said Tommy Xie, an economist at OCBC.

Strong external demand has been supporting Asia’s manufacturing sectors, including China’s, but Beijing’s monetary tightening and heightened environmental protection measures may have started to bite, he said.

Almost all major components of the index, including new orders, output and prices, edged lower in October. Despite the decline, the headline index has remained above 50 for 15 months. A reading above that level indicates expansion while a reading below 50 indicates a contraction.

Zhao Qinghe, an analyst with the National Bureau of Statistics, said manufacturing activities in heavily polluting industries and those with high energy consumption contracted in October, while high-tech and consumer-related manufacturers continued to expand rapidly.

The subindex measuring new orders declined to 52.9 from 54.8 in September, while the new-export index fell to 50.1 from 51.3. The production subindex fell to 53.4 from 54.7, the statistics bureau said.

Cooling economic activity also reflects softer investment spending in response to slower credit growth and the unwinding of the fiscal support that preceded the party congress, said Julian Evans-Pritchard, an economist at Capital Economics.

China’s official nonmanufacturing PMI, also released Tuesday, dropped to 54.3 in October from 55.4 in September.

Investors may have panicked over the prospect of a further tightening in monetary policy following the party congress, said Mr. Xie, the OCBC economist.

“In fact, the central bank has been injecting funds to nurture liquidity conditions but investors don’t seem to buy it,” he said. “I’m going to watch closely to see if the central bank sends any strong signals to calm the market.”

Source: Dow Jones

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