Home / Business / China factory growth weakest for over two years, decline in export orders is increasing

China factory growth weakest for over two years, decline in export orders is increasing

BEIJING (Reuters) – China's manufacturing industry grew at its weakest pace in more than two years in October, weakened by slowing domestic and foreign demand. This indicates an increasing gap in the economy due to a worsening trade war with the United States.

FILE PHOTO: A worker cuts steel bars at a construction site of a railroad bridge in Lianyungang, Jiangsu Province, China, September 1

2, 2015. REUTERS / China Daily

Fear of China's slowing growth and its likely impact on the global economy The financial markets have turned It has been annoyed recently and Wednesday's official Purchasing Manager's Index (PMI) shows that investors are facing more stress over the coming months.

The official PMI – which gives global investors a first look at the business conditions in China at the beginning of the last quarter of the year – fell to 50.2 in October, the lowest since July 2016 and 50.8 in September.

It was a touch above the 50-point mark that separates growth for a 27th consecutive month from contraction, but was inferred by the 50.6 forecast in a Reuters poll.

The recent reading points to a further loss of momentum in the world's second largest economy, and the deteriorating business environment could lead to more political support from Beijing than a series of recent initiatives.

"All figures from China's PMI release today confirm a broad decline in economic activity," said Raymond Yeung, chief economist for China at ANZ, in a customer announcement. He added that conditions for the private sector are "much worse". suggested as headlines.

"In addition to an expected reduction in reserve requirements (RRR) in January, we expect future supportive policies to be measured. The primary task of the government is to avoid a financial boom.

New export orders, an indicator of future activity, contracted for a fifth consecutive month and were the fastest in at least a year. The sub-index fell from 48.0 to 46.9 in September.

While China's exports have been quite resilient, primarily as a front loader to companies to avoid stiffer US obligations, analysts see pressure rising in the coming months. The continued slump in export orders could endure this scenario.

October is the first full month after the entry into force of recent US tariffs. Washington and Beijing imposed additional duties on the other party's goods on September 24, and US President Donald Trump threatens to impose further obligations on China.

If the United States keeps its promise to raise its tariffs to 25 percent by the turn of the year, exporters will feel more pain.

"The 25 percent tariff will be activated in January … Perhaps weakening new export orders in the PMI is a warning sign of what's coming, even if it's not reflected in the hard data yet." said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

Global policymakers remain concerned about the broader impact of US protectionist policies.

Japan reported weak September industrial production on Wednesday, partly due to the Sino-US trade dispute hampering its exports, while South Korea's factory output shrank by more than 1 1/2 years last month.


The Chinese PMI survey also revealed that the October manufacturing sub-index fell from 53.0 in September to 52, while new orders plummeted from 52.0 to 50.8. This points to much weaker domestic demand.

The Bureau of Statistics attributed the slump in production activity in October to the effects of a one-week national holiday and the difficult external environment.

More than 70 percent of US companies operating in southern China intend to postpone further investment there and to shift all or part of their production to other countries, as the trade war is generating profits, according to a survey on Monday.

China's economy has grown at the slowest pace since the global financial crisis in the third quarter, as output and infrastructure investment eased. Analysts predict that business conditions will deteriorate before they improve.

Companies are already under yield pressure. A weekend survey showed that earnings growth in the country's industrial powers had slowed in September for the fifth year in a row due to a stronger slowdown in production and sales.

China's manufacturing industry has been pressured by the reduction in credit sources as Beijing's multiyear crackdown on corporate debt and risky lending practices has come under pressure, particularly among smaller companies.

Policymakers have already shifted their priorities to reduce growth risks. Earlier this month, the Chinese central bank announced the reduction of the fourth reserve requirement (RRR) for this year and should further ease monetary policy.

In addition, measures to reduce financing costs are being stepped up and more support has been given to private companies, which are a major source of employment. On the tax side, the government is stepping up stimulus from infrastructure projects and announced further tax cuts next year to support growth.

Another sister survey published by the NBS on Wednesday showed that growth in China's large service industry had slowed in October.

However, a sub-index of construction activity improved, suggesting that the government's infrastructure surge may be prevailing, analysts say.

Nevertheless, some economists believe that Beijing will soon have to stimulate the stimulus.

"Beijing's policy has so far focused on curbing credit freezes," said Nomura analysts.

"If our more cautious views prove valid, growth in the spring of 2019 is likely to slow to a worrying rate that may allow Beijing to ramp up its easing / stimulus measures at that point in time."

Reporting by Stella Qiu and Ryan Woo; Additional coverage by Lusha Zhang; Cut by Shri Navaratnam

Our Standards: The Thomson Reuters Trust Principles.

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