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China's October PMIs point to cooling domestic demand

Economists say the economy is slowing faster than it should and could be much more efficient

HSBC chief economist for China Qu Hongbin says the economy still shows signs of insufficient effective demand.


CHINA'S October Purchasing Managers' Index (PMI) out over the weekend shows that domestic demand is weighing on growth and suggests that the economy will continue to slow for the remaining quarter of this year.

The official PMI released jointly by the National Bureau of Statistics (NBS) came in below expectations and slipped to a five-month low while the non-manufacturing PMI, which monitors the service sector fell to 53.8 in October from 54.0, the weakest reading since January.

A private PMI survey published by HSBC and Markit rose moderately to a final reading of 50.4 in October from 50.2 in September, but could not mask the inherent weakness in demand. The jump was due to resilient employment and not a pickup in activity.

Growth in new orders at home and abroad slowed in October and producer prices fell, highlighting soft domestic demand, the private survey showed. "While the manufacturing sector likely stabilised in October, the economy continues to show signs of insufficient effective demand," said Qu Hongbin, chief economist for China at HSBC. This was in line with the official reading which showed demand slowing to a six-month low and the new orders index falling to 51.6 in October from 52.2 in September.

China's third quarter GDP expanded 7.3 per cent, the slowest pace since the 2009 global financial crisis and analysts warn that the economy could slow further as the domestic economy faces a continued slump in the property sector and excess capacity in industries ranging from cement to steel.

The central bank has been keeping liquidity conditions tight over the past year with the aim of weaning companies off years of cheap and often misallocated credit. This has resulted in many banks cutting credit lines for private firms, putting more stress on their bottom lines. On Friday, officials warned that factories were under pressure from high borrowing costs, which were accentuating the sector's slowdown.

While large manufacturers grew last month with their PMI little changed, business shrank for small- to medium-sized factories. "The weakness remains concentrated in domestic demand," said Julian Evans-Pritchard, economist with Capital Economics. This is despite numerous measures implemented since April to boost activity in the housing and railway sectors. Beijing has also cut taxes and reduced reserve requirement ratios for banks to spur lending.

In September mortgage rates were cut with the hopes of kicking back some life into the property market which, according to some estimates, accounts for up to 50 per cent of GDP. But another survey released over the weekend showed that prices in the real estate sector fell for a sixth straight month.

China has set an official growth target of "about" 7.5 per cent for 2014, as the government wants to steer the country on to a more sustainable growth path. Though slower growth is not necessarily bad for China which has to deal with the costs of a decade of double-digit growth, many economists say the economy is slowing faster than it should and could be much more efficient.

Last week, the World Bank in its quarterly report cut its growth forecast for 2014 to 7.4 per cent and to just above 7 per cent for 2015. "Targeted support measures and the recovery of external demand have limited the growth slowdown, but pressures from the weak housing market remain a significant drag on domestic economic activity," the report said.

"We still see uncertainties, given the property downturn as well as the slow pace of global recovery, and expect further monetary and fiscal easing measures in the months ahead," Qu Hongbin of HSBC said.