November 1, 2018 / 3:11 AM / 19 days ago

China's factory sector barely grows in October, export orders extend slump: Caixin PMI

BEIJING (Reuters) - China’s manufacturing sector barely grew after stalling in September, a private survey showed, while an extended contraction in export orders highlighted rising pressure on the economy as a trade war with the United States intensified.

FILE PHOTO: A man works on electric machine parts at a workshop of an equipment manufacturing company in Weifang, Shandong province, China October 31, 2018. China Daily via REUTERS

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for October, released on Thursday, edged up to 50.1 from 50.0 in September. Economists polled by Reuters had forecast a reading of 49.9, just off the 50-mark that divides expansion from contraction.

The rather shallow growth last month was in line with an official PMI survey released on Wednesday that showed China’s manufacturing sector expanded at the weakest pace in over two years.

The feeble performance in the vast factory sector, a major domestic and global driver of growth, backs expectations of further stimulus support from Beijing as it tries to prevent a sharp downturn for the economy. The Sino-U.S. trade row, and the risks from the dispute to the Chinese and global economies, have rattled financial markets recently.

The Caixin survey showed factory output dropped for the second straight month and was only fractionally above the neutral 50.0 level, amid weaker demand at home and abroad. That dragged business confidence among manufacturers to an 11-month low.

“China’s economy has not seen any obvious improvement,” said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, in a note accompanying the survey.

“The expansion across the manufacturing sector was still weak. Production and business confidence continued to cool despite stable demand. The pressure on production costs didn’t ease.”

While new export orders - an indicator of future activity - improved to 48.8 from 47.6 in September, they remained in contraction phase for the seventh consecutive month as the trade war with the United States deepened.

October was the first full month after the latest U.S. tariffs went into effect.

Washington and Beijing slapped additional tariffs on each other’s goods on Sept. 24, and U.S. President Donald Trump has threatened to hit China with more duties.

WORSE BEFORE GETTING BETTER

The external pressure is already starting to depress activity in major areas of China’s economy, which grew at its weakest pace since the global financial crisis in the third quarter. Analysts say business conditions will get worse before getting better.

The sub-index for overall new orders - domestic and foreign - rose slightly to 50.4 from 50.1 in September.

The survey also showed input price pressures remained high for Chinese manufacturers, due to higher costs for raw materials like steel in particular. That could put a further squeeze on profit margins, and risks setting off a vicious circle of lower business investment, job losses and deepening gloom for the broader economy.

China’s manufacturing sector has been squeezed by a reduction in sources of credit amid Beijing’s multi-year crackdown on corporate debt and risky lending practices, with smaller firms especially under strain.

China will take more timely steps to support its economy, which faces increasing pressures, the politburo, a top decision-making body of the ruling Communist Party, said on Wednesday.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio for banks four times so far this year to spur commercial lenders to extend more credit. Yet many small firms say financing conditions remain tight.

“The effect of the reductions is already apparent, but if and when the ratio is cut again, one needs to observe the effectiveness of policy transmission,” PBOC Vice Governor Zhu Hexin told Reuters on the sidelines of a forum in Beijing on Thursday.

Faced with higher costs and sluggish demand, Chinese manufacturers have been reducing staff levels for about five years straight.

The aerospace research and manufacturing sector remained the worst-performing sector in the third quarter, according to an employment index report jointly released by the China Institute for Employment Research and a leading Chinese career platform Zhaopin.

“The trade/import and export sector continued to drop in job openings in the third quarter of 2018, reflecting the continuous influence of the U.S.-China trade war,” the report said.

But the rate of payroll reduction in the manufacturing sector slowed from September, according to the Caixin survey, which focuses more on small and medium-sized companies which are vital to China’s job creation.

Chinese officials have pledged to prevent extensive job losses.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the PMIs suggested more loss of momentum in the coming months and further policy support.

“The readout from yesterday’s politburo meeting leaves little doubt that policymakers will respond to this downward pressure with additional stimulus measures, though we don’t think this will succeed in putting a floor beneath growth until the middle of next year.”

Reporting by Cheng Fang and Ryan Woo; Additional reporting by Yawen Chen; Editing by Shri Navaratnam

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