China’s Official Factory Gauge Signals Contraction Continues

Updated on
  • Manufacturing PMI remained at 49.8 in October, below estimates
  • Reading suggests `managed stabilization,' Commerzbank says

China’s first key indicator this quarter, an official factory gauge, missed analysts’ estimates, signaling that the manufacturing sector has yet to bottom out as global demand falters and deflationary pressures deepen.

The official purchasing managers index was unchanged at 49.8 in October, the National Bureau of Statistics said Sunday, compared with the median estimate of 50 in a Bloomberg survey. It was the third straight reading below 50, the line between expansion and contraction. The official non-manufacturing PMI, a barometer of services and construction, fell to 53.1 from 53.4 in September, the weakest since December 2008.

“The manufacturing sector is still contracting, though stabilizing," and the report indicates economic momentum remains sluggish, said Liu Ligang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “We still believe the Chinese economy will experience modest rebound supported by faster infrastructure investment in November and December.”

The newest data highlight the challenges confronting China’s old growth drivers. The nation’s leaders have reiterated priorities of both reforming the economy and maintaining medium- to high-speed growth in the next five years, according to a communique released by Xinhua News Agency on Thursday.

The readings suggest continued monetary easing by the central bank hasn’t yet boosted smaller businesses as much as their larger, state-owned counterparts, which are able to borrow at reduced rates.

"Big companies are stabilizing, while smaller ones continue to perform below the contraction-expansion line," Zhao Qinghe, a senior statistician at NBS, wrote in a statement interpreting the data on Sunday. "The percentage of small companies facing a financial strain is considerably higher than that of bigger companies."

‘Managed Stabilization’

The unchanged manufacturing PMI suggests "managed stabilization" as policy makers strive to balance growth, reform, and market stability, according to Zhou Hao, a senior economist at Commerzbank AG in Singapore.

The manufacturing sector stabilized "somewhat" due to monetary policy easing, Zhou said, while slowing power generation, steel production and housing sales are "suggesting that the overall economy is still under downward pressure."

The employment gauges of both manufacturing and non-manufacturing sectors remained mired in contraction zone, Sunday’s report showed. China’s survey-based unemployment rate picked up slightly to around 5.2 percent in September, while a ratio of job supply and demand rose in the third quarter.

One highlight in Sunday’s data was a pickup in the activities of the construction sector. The reading of new construction orders jumped by 5.5 percentage points to 55.1, signaling demand recovering, according to the NBS statement.

New export orders showed declines in both PMI gauges, indicating the nation’s exporters are still challenged as they enter the final quarter of the year.

The PMI report suggests that measures to support growth over the past year haven’t been enough and additional easing, most likely in the form of more targeted measures, may prove necessary to prevent a further slide in fourth-quarter output, according to Fielding Chen, a Bloomberg economist in Hong Kong. The People’s Bank of China has cut its benchmark interest rate six times in the past year, to a record low.

“This has reduced funding costs for firms and provided support for the slowing economy,” Chen wrote in a report Sunday. “Nevertheless, it may not be enough to offset headwinds from lackluster investment and weak exports.”

(A previous version of this story was corrected to show Manufacturing PMI index was unchanged.)