China’s declining manufacturing activity is a sign of economic problems ahead

  • Official production PMI in October of 49.2 against 49.6 in September
  • October official services PMI of 52.4 against 53.2 in sept
  • Officially composed PMI in October of 50.8 against 51.7 in sept

BEIJING, Oct. 31 (Reuters) – China’s manufacturing activity fell more than expected in October to shrink for another month, hurt by persistently high commodity prices and softer domestic demand, pointing to more economic turmoil in the last quarter of 2021.

The official Production Purchasing Managers’ Index (PMI) was 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 extensive manufacturing sector has been steadily declining this year, with production growing at its weakest pace since September 2020 due to environmental constraints, power rationing and higher raw material prices. Read more

Consistent with the softer overall PMI, a sub-index of output fell to 48.4 in October from 49.5 in September. A sub-index for new orders also fell for a third month and came in at 48.8.

“About one-third of the companies surveyed cited insufficient demand as their biggest difficulty, suggesting that insufficient demand had limited their production,” said Zhang Liqun, an analyst at China Logistics Information Center.

More worrying is that a sub-index of output prices rose to 61.1, the highest since 2016, when the Bureau of Statistics began publishing the indicator, suggesting rising inflationary pressures as broader economic growth slows.

“The manufacturing index has fallen to its lowest level since its release 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 product price index rose to its highest level since it was released in 2016. These signals confirm that China’s economy is probably already undergoing stagflation.”


Factory inflation rose to a record high last month due to rising commodity prices, but weak demand limited consumer inflation, forcing politicians to take a tight line between supporting the economy and raising producer prices further. Read more

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

“Production remains weak, indicating that the demand problem may be relatively large and there is still a need for some easing of policy,” said Zhou Hao, senior economist at Commerzbank.

The official PMI for non-manufacturing in October fell slightly to 52.4 from 53.2 in September, with services returning to expansive at the end of a COVID-filled summer.

New clusters of COVID-19 returned in October, particularly in the north, which in turn could disrupt economic activity and give the service sector another blow due to strict restrictions to limit the disease.

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

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

China’s official composite PMI for October, which includes both manufacturing and service activity, was 50.8, down from September 51.7.

Reporting by Ryan Woo and Gabriel Crossley; Edited by William Mallard and Richard Pullin

Our standards: Thomson Reuters Trust Principles.


Leave a Comment