China October factory growth seen easing slightly as smog war begins

Activity in China’s manufacturing sector likely grew at a slightly slower pace in October as the government began a major crackdown on air pollution, ordering many steel mills, smelters and factories to curtail or halt production over the winter, a Reuters poll showed.

But official readings are still expected to show a healthy rate of expansion for manufacturing overall, buoyed by a continuing government infrastructure spree and strong global demand for China’s exports heading into the peak year-end shopping season.

The data will give global investors their first look at business conditions in China at the start of the fourth quarter, with the war on smog adding to uncertainty and coinciding with early signs of a slowdown in the world’s second-largest economy.

The official manufacturing Purchasing Managers’ Index (PMI) on Tuesday is expected to come in at 52.0 for October, down from 52.4 in September, which was the highest in over 5 years, according to a median forecast of 36 economists polled by Reuters.

That would be the 15th month in a row that the reading remained above the 50-mark that divides expansion from contraction on a monthly basis, and would still be the second-highest in the last five years.

A recovery for China’s manufacturing and industrial firms — boosted by government spending, a resilient property market and

unexpected strength in exports — has helped the economy post better-than-expected growth of nearly 6.9 percent through the first nine months of this year.

Profits for China’s industrial powerhouses surged 27.7 percent in September, the most in nearly six years, as environmental inspections and the start of plant closures in northern provinces sparked fears of supply shortages and sent prices of finished goods like steel and copper sharply higher.

Prices of steelmaking raw materials such as iron ore and coking coal, however, have started to dive on fears of excess supply, which should start to weigh on mining companies.

The pollution closures come on top of ongoing government efforts to trim down and upgrade the country’s bloated industrial sector by shutting down outdated capacity, which has also helped support producer prices.

SMOKE GETS IN YOUR EYES

While third-quarter GDP growth data released earlier this month hardly skipped a beat after a strong first half, the economy is starting to show some signs of fatigue in two of its main drivers – property and construction.

Still, senior officials said recently that China is still well on track to meet its official 2017 growth target of around 6.5 percent, despite the punishing war on pollution.

Economists expect the findings of a private survey on China’s factory activity on Wednesday will show activity in October expanded a similar rate to the previous month.

They predict the private Caixin/Markit Manufacturing Purchasing Managers’ index (PMI) will be unchanged at 51.0 in October versus the previous month.

The private survey tends to focus on small and mid-sized firms, which have not benefited as much from the year-long state-led construction boom as large, government-owned “smokestack” industries.

The official PMI survey will be published on Oct. 31, along with a similar official survey covering the services sector. The Caixin PMI will be published on Nov. 1, with a Caixin services PMI to be released on Nov. 3.
Source: Reuters (Reporting by Elias Glenn; Editing by Kim Coghill)

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