China’s official factory gauge signals contraction continues

Beijing / Singapore: China’s first key indicator this quarter, an official factory gauge, missed analysts’ estimates, signalling 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 stabilising,” 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 stabilisation” 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 per cent 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 lacklustre investment and weak exports.”

[BOX] Premier Li says ‘a lot of room’ left for China consumption to grow

SEOUL: China is firmly committed to restructuring and reforms and consumption has “a lot of room” to grow, Premier Li Keqiang said on Sunday, dismissing concerns that the economy may be at risk of a hard landing.

The world’s second-largest economy continues to grow at nearly 7 per cent, Li told a gathering of business leaders in South Korea, which counts China as its largest export market.

“The Chinese economy will maintain a mid- to high-level of growth for quite some time in the future,” Li said, according to comments released by the Korean Chamber of Commerce and Industry, one of the groups that hosted the premier.

“We will firmly pursue restructuring and reform. There may be fluctuations in economic indicators but there will not be major ones.” Li is on an official visit to South Korea and attended the first summit of the leaders of South Korea, Japan and China in more than three years on Sunday.

“China possesses a large market, and it has potential, in particular, the consumption potential has not been fully realised,” he said. “We believe Chinese consumption is at half [its capacity]. There is still a lot of room.” China said last week that it will significantly increase the share of consumption in its economic growth in the next five years and increase its targeted adjustment to economic policy to keep growth at a relatively quick pace.

Li said it was natural for the rate of growth to slow as the economy grew in scale.

“You may have seen reports that the Chinese economy is continuously slowing, but when you look at the figures, the rate is gradually falling.” Weighed down by weak exports, industrial overcapacity and high local government debt, China’s economy grew by 6.9 per cent in the third quarter from the same period a year earlier, far more robustly than more developed economies but still its slowest pace of expansion since the global financial crisis.

Earlier on Sunday, South Korea reported its exports slumped the most in more than six years in October, with hefty drops in shipments to China, the United States and Europe suggesting a further weakening in global demand.

-Reuters