China factory activity unexpectedly shrinks in Oct, dents recovery momentum

By Joe Cash

BEIJING (Reuters) - China's manufacturing activity unexpectedly contracted in October, underlining the daunting task facing policymakers as they try to revitalise economic growth heading into the end of the year and 2024 amid multiple challenges at home and abroad.

Recent indicators pointed to encouraging signs of stabilising in the world's second-largest economy, supported by a flurry of policy support measures, although a protracted property crisis and soft global demand remain major headwinds.

The non-manufacturing PMI also fell to 50.6 last from 51.7 in September, indicating a slowdown in activity in the vast service sector and construction.

"The weak PMI data may reflect some of the weakness in demand related to the housing slump and a slowdown in infrastructure spending," said Xu Tianchen, senior economist at the Economist Intelligence Unit.

"Although there are signs of exports bottoming out, a strong recovery in external demand is probably elusive," he added.

Both new export and imports orders shrank for an eight consecutive month, suggesting that manufacturers were struggling for buyers overseas and ordering fewer components used in finished goods for re-export.

Foreign buyers returned in force for the autumn round of the Canton Fair in Guangzhou, the world's largest trade show, but Chinese sellers said orders remain low as Christmas nears, with few expecting global demand to recover soon.

"Production in September was visibly better than in previous months due to improved domestic demand, which squeezed down industrial prices. In October, we saw a wider effort in the industrial sector to cut supply to cope with a profit squeeze."

The squeeze on business profits was underscored by factory gate prices contracting sharply this month, a sub-index in the PMI survey showed.

Prices of most nonferrous metals fell following the data release. China accounts for more than half of the global consumption of most base metals, which are widely used in the manufacturing sector.

MORE SUPPORT NEEDED

Policymakers have since June unveiled a raft of measures after a rapid loss of economic momentum following a brief post-COVID rebound, including modest interest rate cuts, increased cash injections and more aggressive fiscal stimulus.

But analysts say more policy support may be needed to ensure the economy reaches Beijing's annual gross domestic product (GDP) target of about 5%.

Some government advisers are recommending China lifts its 2024 budget deficit target beyond the 3% of GDP set for this year, which would allow Beijing to issue more bonds to revive the economy.

HSBC on Monday said it believed the worst may be over for China's shaky commercial real estate market, as a further $500 million charge from the sector dragged the bank's third quarter profits below forecasts.

Yet, the overall real estate industry, which accounts for almost a fourth of the country's economic output, has shown few signs of turning a decisive corner since plunging into debt crisis two years ago.

Data out this month showed China's new home prices fell for a third straight month in September, a traditionally peak home buying period, while property sales and investment extended double-digit declines. High youth unemployment, elevated debt levels and a weakened yuan are also complicating Beijing's efforts to revive activity.

China's top parliamentary body last week approved a 1 trillion yuan ($137 billion) sovereign bond issue in the fourth quarter, and passed a bill allowing local governments to front load part of their 2024 bond quotas to support investment and economic growth.

And earlier this month, the central bank injected the biggest cash support since late 2020 via short-term policy loans to allow banks to extend credit as well as keep interest rates low.

"The additional 1 trillion yuan will help in November and December," Economist Intelligence Unit's Xu said.