Factory growth in China is the weakest in more than two years, contraction in export orders is strengthening

BEIJING (Reuters) – In October, the Chinese manufacturing sector experienced the strongest growth in more than two years, penalized by the slowdown in domestic and external demand, a sign of the deepening of the economic cracks resulting from the slowdown. Intensification of the trade war with the United States.

Concern over the slowdown in Chinese growth and its likely impact on the global economy has recently vexed financial markets, and the official Wednesday Purchasing Index (PMI) indicates that investors will be under more stress over the coming months. next few months.

The official PMI – which gives global investors a first glimpse of the business situation in China at the beginning of the last quarter of the year – fell to 50.2 in October, its lowest level since July 2016 and down by compared to 50.8 in September.

It was a little above the 50-point mark that separates growth from contraction for a 27th consecutive month, but lower than the 50.6 forecast in a Reuters survey.

The latest reading suggests a further slowdown in the world's second-largest economy, and the deteriorating business environment could prompt Beijing to strengthen its political support, in addition to the many recent initiatives.

"All figures released today by PMI in China confirm a widespread decline in economic activity," said Raymond Yeung, chief economist for China at ANZ, adding that conditions for the private sector were "far worse" than the suggested title data.

"In addition to the reduction in the reserve requirement ratio (RRR) scheduled for next January, we expect that future favorable policy measures will be measured. The government's priority is to avoid a financial explosion. "

New export orders, indicators of future activity, contracted for a fifth straight month and at the fastest pace in at least a year. The sub-index rose from 48.0 in September to 46.9.

While Chinese exports have held up well, largely thanks to companies' anticipated shipments to escape stricter rights in the United States, analysts say the pressure will mount in the coming months. The steady decline in export orders could be at the origin of this scenario.

October is the first full month after the entry into force of the latest US tariffs. Washington and Beijing imposed additional tariffs on their respective products on September 24, and US President Donald Trump threatened to hit China with more rights.

If the United States keeps its promise to increase their tariffs to 25% by the end of the year, exporters will feel worse about the ease.

"The 25 percent duty rate will be activated in January (…). Perhaps the weakening of new export orders in the PMI is a harbinger of the price." the future, even if it has not yet been reflected in the figures, "said Julian Evans. -Pritchard, Senior Economist for China at Capital Economics.

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

Japan announced a weak industrial production for September, partly attributable to the Sino-US trade dispute, which weighed on its exports, while last month's factory output from South Korea recorded the sharpest contraction in Japan. a year and a half.

STIMULUS GREATER?

China's PMI survey also showed that the output sub-index fell from 53.0 in September to 52 in October, while new orders fell sharply from 52.0 to 50.8 , a sign of much weaker domestic demand.

The statistics office attributed the decline in October manufacturing activity to the impact of a national holiday for a week and the difficult external conditions.

More than 70 percent of US companies operating in southern China plan to delay their investments and transfer some or all of their manufacturing activities to other countries in the wake of the trade war, a study said on Monday. .

The Chinese economy has experienced the slowest growth since the global financial crisis in the third quarter, as manufacturing output and infrastructure investment slowed. Analysts believe that working conditions will deteriorate before improving.

Companies are already under pressure on their profits. A study over the weekend showed that profit growth in the country's industrial power plants slowed for the fifth consecutive month in September, due to a further slowdown in production and sales.

The Chinese manufacturing sector has been constrained by the reduction of credit sources following the multi-year repression of corporate debt and risky credit practices in Beijing, with small businesses being particularly challenged.

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

It is also stepping up efforts to reduce funding costs and is committed to providing more support to private companies, an essential source of jobs. On the fiscal side, the government is stepping up stimulus measures through infrastructure projects. He also promised further tax cuts next year to support growth.

Another parallel poll released Wednesday by the NBS showed that growth in China's broad service sector slowed in October.

However, a sub-index of construction activity has improved, suggesting that the surge in government infrastructure could take root, say analysts.

Nevertheless, some economists believe that Beijing may need to quickly strengthen its stimulus.

"Until now, Beijing's policy was aimed at limiting the freeze on credit," said Nomura analysts.

"If our more cautious views prove valid, growth will likely slow at such an alarming rate in the spring of 2019 that Beijing may need to significantly step up its easing / stimulus measures at that time."