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China factory PMI falls from five-year high on pollution cleanup

[BEIJING] China's official factory gauge fell this month, with new orders and prices leading the decline, as officials increasingly prioritize a campaign to clamp down on polluting industries and rein in debt.

The manufacturing purchasing managers index fell to 51.6 in October, vs. 52 forecast in Bloomberg survey, and five-year high of 52.4 in Sept.

The non-manufacturing PMI stood at 54.3 vs. 55.4 in previous month Numbers higher than 50 indicate improving conditions; readings below 50 signal a worsening outlook

BIG PICTURE

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With the economy transitioning away from a growth-at-all-costs model, officials are prioritising the environment and a push to tame credit growth - key policy directions that were highlighted during the twice-a-decade Communist Party Congress this month.

Still, China is poised for its first full-year growth acceleration, defying predictions of a sharper slowdown triggered by the leverage campaign and property risks.

BLOOMBERG INTELLIGENCE

"The data suggest growth remains on track to hit the government's '6.5 per cent or above' target for this year," Bloomberg Intelligence economist Fielding Mr Chen wrote in a note. "Continued, if slightly milder, growth momentum would provide leeway for the government to push ahead with its deleveraging agenda," Chen wrote.

ECONOMIST TAKEAWAYS

"The overall steadiness in the economy remains intact," Zhao Hongyan, China economist at Huatai Financial Holdings Ltd. in Hong Kong. "The Party Congress didn't send any signals for upcoming massive stimulus, so it's unlikely this year or next."

The lower PMIs may indicate a moderation this quarter, Betty Wang, Hong Kong-based senior economist at Australia & New Zealand Banking Group, wrote in a note. "But it is unlikely to change the broad picture of steady growth in 2017."

"Tighter environmental supervision has definitely impacted the PMI in October as shown in the breakdown," said Gao Yuwei, a researcher at Bank of China Ltd.'s Institute of International Finance in Beijing. "Yet the strong industrial profits last month indicated that manufacturing is doing fine. As the winter season nears, factories in the north may have to reduce production due to pollution restrictions, but the drag effect won't be so serious as manufacturing's overall contribution to GDP growth has been declining."

THE DETAILS

PMI for high energy-consuming and highly-pollution sectors sank to below 50, as "some regions intensified their efforts to clean up the environment," the National Bureau of Statistics said in a statement.

New orders declined to 52.9 from 54.8, the biggest drop since May 2012 Input and output prices both slid Conditions for small, medium-sized enterprises both deteriorated Steel industry PMI slipped to 52.3 Higher-end and consumption-related activities continue to drive growth, according to the statement.

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