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Allen Pierce Equity Partners
Allen Pierce Equity Partners Insights

China Manufacturing Unexpectedly Falters in October

China's manufacturing sector had an unexpected setback in October, casting a shadow on the efforts to rejuvenate economic growth by the end of this year and for 2024 amid several obstacles on the domestic and international fronts.

Recent indicators had suggested the world's second-largest economy was stabilizing, thanks to various policy support measures, but the prolonged property crisis and soft global demand remained significant challenges.

Official data from the National Bureau of Statistics revealed that the Purchasing Managers' Index (PMI) dropped to 49.5 in October, falling below the critical 50-point threshold that marks the boundary between economic contraction and expansion, lower than the anticipated 50.2 and even worse than the most pessimistic prediction of 49.9.

The non-manufacturing PMI also declined, falling to 50.6 from 51.7 in September, indicating a slowdown in the massive service and construction sectors.

The weak PMI data may reflect some of the weakness in demand caused by the housing slump and a knock-on slowdown in infrastructure spending, and despite signs of exports bottoming out, a strong recovery in external demand seems tenuous.

Both new export and import orders have shrunk for the eighth month, highlighting manufacturers' struggles to find overseas buyers and reduce orders for components used in finished products for re-export.

One positive sign was the return of foreign buyers to the autumn round of the Canton Fair in Guangzhou, the world's largest trade show, but Chinese sellers reported low orders, and with Christmas approaching, few expect demand to recover anytime soon.

Analysts explained that the falling October PMI figure reflects more of an adjustment in supply than a change in demand. In September, production had improved due to better domestic demand, which compressed industrial prices. In October, there was a more widespread effort in the industrial sector to cut supply in response to profit pressures.

The pressure on profits was further underlined by factory gate prices contracting significantly in October, as reflected by figures announced in a sub-index of the PMI survey.

The price drop extended to most nonferrous metals, impacting the manufacturing sector, as China accounts for over half of the global use of these base metals. In the currency market, the offshore yuan fell after the release of the figures.

To counter the economic slowdown, policymakers had introduced a series of measures, including modest interest rate cuts, cash injections, and more aggressive fiscal stimulus, although further policy support might be necessary to achieve Beijing's annual GDP target of about 5%.

While some signals indicate that the worst may be over for China's unstable commercial real estate market, significant challenges remain, particularly in the overall real estate industry, which contributes almost a quarter of the country's economic output.

Recent data showed that China's new home prices dropped for a third consecutive month in September, during a traditionally high home-buying season, while property sales and investment continued to fall at double-digit rates. High youth unemployment, rising debt levels, and a weakened yuan further complicate efforts to reinvigorate economic activity.