China's Manufacturing Sector Experiences Surprising Contraction in October Amid Decreased Demand
China's manufacturing sector faced an unexpected contraction in October due to a decline in demand, highlighting the need for enhanced policy measures to stimulate growth in the crucial industry
China's manufacturing sector, which is known for its massive size, has once again experienced a contraction due to a lack of demand. This has resulted in increased calls for robust policy support that can stimulate growth. According to China's National Bureau of Statistics (NBS), the official manufacturing Purchasing Managers Index (PMI) decreased to 49.5 in October from 50.2 in September. This figure fell short of the estimated 50.2 from a recent Reuters poll of analysts.
The non-manufacturing PMI, encompassing the services and construction sectors, declined to 50.6 this month, marking the lowest level since China eased its Covid-19 restrictions in December 2022.
The PMI serves as a monthly gauge of economic activity, with a reading above 50 signaling expansion and below 50 indicating contraction.
The manufacturing PMI was impacted by the Golden Week holiday in October, resulting in fewer working days, as reported by the NBS. This contraction highlights the vulnerability of the world's second largest economy. China's economy is currently facing various challenges, including sluggish consumer spending, a worsening property crisis, and subdued international demand.
The manufacturing sector, responsible for 28% of the GDP, experienced a continuous decline for five months until September. However, it showed signs of growth during that month, raising optimism that the economy had reached its lowest point.
"The unanticipated decrease in manufacturing PMI indicates that China's recovery is a challenging journey due to the persistently weak domestic demand," commented Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
According to the NBS survey, there was a decrease in new factory orders in October compared to the previous month, indicating a decline in demand. Additionally, the employment sub-index also showed a drop, implying that factories had reduced their hiring activities.
Nomura analysts suggest that the decrease in the non-manufacturing PMI after the Golden Week holiday indicates a swift reduction in the previously accumulated demand for travel and gatherings.
Overall, "the weak PMI reinforces the case for stronger fiscal policy support," Zhang said.
Beijing has ramped up stimulus measures in recent weeks
China's top parliamentary body has recently given its approval for a 1 trillion yuan ($137 billion) sovereign bond issuance aimed at revitalizing the economy. The authorities have specified that these funds will be dedicated to infrastructure development projects in regions affected by natural disasters.
Furthermore, property easing measures are now being implemented across the country. Several cities, such as Hangzhou and Liuzhou, have recently relaxed their regulations on home purchases.
President Xi Jinping commenced a crucial financial policy conference in Beijing on Monday, marking the first assembly of its kind in six years. The purpose of this meeting is to explore strategies to stimulate growth and address financial perils, such as the escalating debt of local governments. According to Zhaopeng Xing, the senior China strategist for ANZ Research, mitigating risks associated with local governments will necessitate a blend of proactive fiscal measures and accommodative monetary policies moving forward.
He anticipates that the People's Bank of China will reduce the reserve requirement ratio (the portion of deposits that commercial banks are obligated to retain as reserves) by 50 basis points during the fourth quarter, potentially injecting 1.2 trillion yuan ($164 billion) into the financial system.
