Factories in China Contract Despite Hopes of Recovery

Factories in China, the world’s second-largest economy, have experienced a surprising setback as its manufacturing activity unexpectedly contracted in October. The country’s official manufacturing purchasing managers’ index (PMI) missed forecasts. They came in at 49.5, down from 50.2 in September. A reading below 50 indicates a contraction compared to the previous month, reversing the brief return to expansion in September.

Dampening Recovery Hopes

These figures have dealt a blow to hopes of increased momentum in China’s economy, especially following stronger growth figures in the third quarter. The unexpected contraction in manufacturing activity has left policymakers grappling with the challenges of addressing a slowdown in the country’s economically crucial property sector and reigniting sluggish growth.

Julian Evans-Pritchard, Head of China Economics at Capital Economics, noted that until this latest data release, the economic outlook was improving. However, the recent numbers have disrupted that optimism. Furthermore, combined manufacturing and non-manufacturing data were the worst on record, excluding Covid-related lockdowns. This data indicates that the services sector is barely growing, if at all.

New China: Slowdown Across Sectors

The non-manufacturing PMI for China in October remained in expansionary territory. However, it showed a slower pace of growth compared to previous months. Economists had expected a reading of 52, but it came in at 50.6, a significant drop from September’s 51.7. Robert Carnell, Head of Asia-Pacific Research at ING, expressed surprise at these figures. He also suggested that the economy still struggles despite the recent positive GDP numbers.

Challenges in the Property Sector

China’s property sector has been under renewed scrutiny, particularly as Country Garden. Once the largest private developer in China, it recently defaulted on its international debts.  The stalling of a restructuring plan at Evergrande, a company whose default two years ago triggered a liquidity crisis across the property industry, further compounded the challenges in this sector.

Pressure for Fiscal Stimulus

The government is targeting a 5% economic growth rate for 2023, which is the lowest official target in decades. Moreover, China faces a challenging road ahead as it works to overcome economic hurdles and bolster its recovery efforts. Separate manufacturing and non-manufacturing indices from private data providers will provide additional insights, shedding light on the broader economic landscape in China.

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