China's factory activity shrinks in October for second month

Beijing

CHINA'S factory activity contracted for a second straight month in October, as electricity shortages and soaring commodity prices continued to weigh on manufacturers.

The official manufacturing purchasing managers' index (PMI) declined to 49.2 from 49.6 in October, the National Bureau of Statistics said on Sunday (Oct 31). That is lower than the 49.7 median estimate in a Bloomberg survey of economists. Readings below the 50-mark signal a contraction in output.

The non-manufacturing gauge, which measures activity in the construction and services sectors, softened to 52.4 from 53.2 in September, below the consensus forecast of 53.

The weakening output sub-index and rebounding output price gauge "confirm that China's economy is likely already going through stagflation," Zhang Zhiwei, chief economist at Pinpoint Asset Management, said in a note.

The pickup in output prices indicates inflation pressures were passed from upstream to downstream firms, which could lead to higher consumer inflation and limit the space for monetary policy easing, Zhang said.

The decline in October's PMI was because "electricity supply was still tight, and prices of some commodities climbed from an elevated level," Zhao Qinghe, a senior statistician at the National Bureau of Statistics, said in a statement.

Manufacturing demand and production both weakened, he said. Smaller businesses, which are mostly in downstream sectors, face greater pressure, as the sub-index for such companies has stayed below the 50 mark for the sixth month, Zhao said.

An electricity crunch that began in September extended into last month, although there are signs that it may have eased as the government rolled out a slew of measures to contain the crisis. On top of that, consumer spending remains weak as Covid-19 outbreaks are flaring up more frequently and manufacturers are battling higher prices as commodity costs soar.

Consumers in general chose to spend the 7-day National Day public holiday at home or in nearby places due to virus and weather factors, Zhao said. The transportation industry expanded at a slower pace than in previous years as a result, he said, while the construction industry remained stable.

On the plus side, exports have boomed, with recent South Korean trade data signalling ongoing strong demand for China's exports last month. The trade conditions still need further monitoring as major economies' recovery from the pandemic have slowed recently, Zhao said.

Economists have been gradually downgrading their growth forecasts for the year as the government continues to rein in the property sector and electricity demand picks up during winter. A set of earliest available indicators tracked by Bloomberg also shows the economy remains under pressure. BLOOMBERG