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China’s Caixin PMI drop adds to signs of economic fragility

Bloomberg • 3 min read
China’s Caixin PMI drop adds to signs of economic fragility
The Caixin manufacturing purchasing managers’ index fell to 49.5 from 50.6 in September, missing economists’ forecast of 50.8. Photo: Bloomberg
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China’s manufacturing activity unexpectedly shrank in October, according to a private survey, signalling that the economic recovery is losing momentum and pressuring policymakers who are trying to shore up growth. 

The Caixin manufacturing purchasing managers’ index fell to 49.5 from 50.6 in September, missing economists’ forecast of 50.8. The 50 line separates expansion from contraction.

The data mirrored the official reading from the National Bureau of Statistics released on Tuesday, which showed factory activity slipping back into contraction at 49.5. The disappointing numbers have stoked concern about the fragility of the economic recovery and fueled calls for more policy support.

Investors have been looking for evidence that China’s recent stimulus measures are shoring up an economic growth that has been challenged this year by weak consumer and business confidence and an ongoing property crisis. The government this month announced more support for the economy, including issuing extra sovereign debt and raising the budget deficit ratio.

The Caixin report “confirmed a softening in economic momentum from September and it’s still a mild recovery,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “Policies will stay accommodative,” he said.

See also: Consider China’s top 20 for investment opportunities

Chinese shares reversed gains, with those trading in Hong Kong losing as much as 0.9% while the mainland’s benchmark CSI 300 Index dropped immediately after the report. The yield on China’s 10-year government bonds was little changed at 2.69% after falling 3 basis points a day ago following the official PMI release. The offshore yuan weakened 0.1% at 7.3349 against the dollar as of 10.59 am local time.

Manufacturing activity elsewhere in Asia also slumped in October as conflict in the Middle East drove oil prices higher, costs rose and global demand remained under pressure, according to data released Wednesday. That’s a discouraging sign for the global economy and bodes ill for China’s foreign trade environment.

Economists have said the weaker Chinese PMI figures reinforced the case for additional stimulus to put growth on firmer footing. Possible measures include raising the budget deficit for 2024, according to Zhang Zhiwei, chief economist at Pinpoint Asset Management Co.

See also: Navigating China's markets

What Bloomberg Economics Says...

“China’s October Caixin manufacturing survey hammered home the message that growth momentum is softening despite proactive policy support — in line with the signal from the official PMI. The surprise decline in the PMI deepens our concerns over prospects for small, export-oriented companies — and the strength and durability of the recovery more broadly.”

— Chang Shu and Eric Zhu, economists 

The People’s Bank of China may cut the amount of cash lenders must hold as reserves, known as the reserve requirement ratio, in the coming weeks to help fund government bond sales. It also has an opportunity to cut the interest rate on its one-year policy loans and add further liquidity in mid-November, as 850 billion yuan ($159.05 billion) of the medium-term lending facility is set to mature.

Standard Chartered’s Ding expects the PBOC to deliver a 50 basis-point RRR cut by the end of this year to help lenders digest additional sovereign bond issuance worth 1 trillion yuan.

The Caixin survey focuses on small and more export-oriented firms, while the official gauge examines mainly larger, state-owned companies. The Caixin survey had outperformed the official gauge a few months this year.

The sample size of the two polls is also different: the Caixin report compiled by S&P Global is based on a survey pool of around 650 private and state-owned manufacturers. The official PMI is based on a survey of 3,200 companies.

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