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China's falling factory activity a sign of economic woes ahead

Published 10/30/2021, 09:16 PM
Updated 10/31/2021, 07:20 PM
© Reuters. An employee inspects a circuit board on the controller production line at a Gree factory, following the coronavirus disease (COVID-19) outbreak in Wuhan, Hubei province, China August 16, 2021. China Daily via REUTERS

© Reuters. An employee inspects a circuit board on the controller production line at a Gree factory, following the coronavirus disease (COVID-19) outbreak in Wuhan, Hubei province, China August 16, 2021. China Daily via REUTERS

BEIJING (Reuters) -China's factory activity contracted more than expected in October to shrink for a second month, hurt by persistently high raw material prices and softer domestic demand, pointing to more economic disquiet in the final quarter of 2021.

The official manufacturing Purchasing Manager's Index (PMI) was at 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 had expected it to come in at 49.7.

China's sprawling manufacturing sector has steadily slowed this year, with output in September growing at its most feeble pace since March 2020 due to environmental curbs, power rationing and higher raw material prices.

In line with the softer headline PMI, a subindex for production slipped to 48.4 in October from 49.5 in September. A subindex for new orders also contracted for a third month, coming in at 48.8.

"About one-third of the surveyed companies listed insufficient demand as their biggest difficulty, indicating inadequate demand had restricted their production," said Zhang Liqun, an analyst at the China Logistics Information Center.

More worryingly, a subindex for output prices rose to 61.1, the highest since 2016 when the statistics bureau started publishing the indicator, suggesting rising inflationary pressures while broader economic growth slows.

"The production index has dropped to the lowest level since it was published in 2005, excluding the global financial crisis period in 2008/09 and the COVID outbreak in February 2020," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

"The output price index rose to the highest level since it was published in 2016. These signals confirm that China's economy is likely already going through stagflation."

POLICY TIGHTROPE

Factory gate inflation rose to a record last month on soaring commodity prices but weak demand capped consumer inflation, forcing policymakers to walk a tightrope between supporting the economy and further stoking producer prices.

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

"Production remains weak, indicating the demand problem may be relatively large, and some easing of policy is still needed," said Zhou Hao, senior economist at Commerzbank (DE:CBKG).

The official non-manufacturing PMI in October eased slightly to 52.4 from 53.2 in September, when services swung back to expansionary at the end of a COVID-fraught summer.

New clusters of COVID-19 returned in October, especially in the north, which could again disrupt economic activity and deal yet another blow to the services sector because of tough restrictions to contain the disease.

"Due to the impact of the epidemic and weather, consumers were more inclined to spend their holidays at home or travel for short distances," said Zhao Qinghe, a senior NBS statistician, in an accompanying statement.

© Reuters. FILE PHOTO: A worker wearing a face mask works on a production line manufacturing bicycle steel rim at a factory, as the country is hit by the novel coronavirus outbreak, in Hangzhou, Zhejiang province, China March 2, 2020. China Daily via REUTERS/File Photo

While the transport sector including air and railway services expanded, the growth was relatively weak, Zhao said.

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

Latest comments

rising price mean less buting power for the screwed ones. so, do the math.
this pandemic allow people to do some research because they had time to stop for a minute now they're saying screw work screw buying things and that thought process is spreading I'm sure everything will be just fine
US will follow in about 6 months.
low demand?! the production index dropped because of power outage across China
China is imploding
Well, gold/copper miners. I'm good.🙂
Just add it to the GDP figures, inflation rates, unemployment, supply chain issues, lack of qualified labor, chip shortage, rising Covid cases, housing bubble, high material prices. It won't matter to the investors. Everything is fine. No worries.
I've said this for weeks.. Reuters is stupid slow
how are you doing today am very happy to hear
BULLISH!
check weekend Dow. It's up 37 points... bad news, good news, market in infinite bullish mode
The bubble continue. Chinese crisis will be the next excuse to print infinite money to help wall street
because FED won't allow price to drop and if price drops too rapidly they'll shut down exchange for a bit
Seems like crisis gonna start from US initially
No more Chinese goods for worthless printed dollars xDDDD
is it I am the only one who thinks that only China provides true economic data in the current scenario.
Probably worse than reported
I'm pretty sure that the data coming out of the US is more reliable. Problem is that it is being ignored by the FED, politicians and investors, which makes it a bigger crime than reporting adjusted numbers
stagflation as in the 70's
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