China Oct PMI edges up, but no turnaround yet

Growth in new orders at home and abroad slows, PMI at 50.4

China's vast factory sector grew a shade faster in October as firms drew more foreign and domestic orders, a private survey showed on Thursday, though analysts said the figure does not point to a fourth-quarter turnaround for the cooling economy.

 

The flash HSBC/Markit manufacturing purchasing managers' index (PMI) edged up to a three-month high of 50.4 from a final reading of 50.2 in September, and just a hair's breadth from the 50.3 reading forecast by analysts.

 

However, while the headline number looked slightly better, manufacturing activity remained subdued and details pointed to continued weakness on a number of fronts.

 

Growth in new orders at home and abroad slowed in October and producer prices fell, pushing factory inflation to a seven-month low and highlighting still-soft domestic demand.

 

The level of output in factories also fell to a five-month low of 50.7, just above the 50-point level that separates growth from contraction on a monthly basis.

 

"The sub-indices do not show good momentum," said Shuang Ding, an economist at Citi in Hong Kong.

 

"Both the production sub-index and the new order sub-index dropped. Those are more relevant in terms of industry production and forward-looking activity."

 

Ding also cautioned that final HSBC/Markit PMI readings have come in lower than the initial flash reading in recent months.

 

China's economy appears likely to miss the government's 7.5% growth target this year and hit a trough not seen since 1990. Third-quarter growth of 7.3% reported on Tuesday was the weakest since the global financial crisis.

 

Most analysts believe authorities will continue to roll out modest support measures in coming months to bolster activity, but they are divided over whether policymakers will take more aggressive action such as across-the-board interest rate cuts unless conditions threaten to sharply deteriorate.

 

"While the manufacturing sector likely stabilised in October, the economy continues to show signs of insufficient effective demand," said Hongbin Qu, chief economist for China at HSBC.

 

"This warrants further policy easing and we expect more easing measures on both the monetary as well as fiscal fronts in the months ahead," Qu said.

 

Economists at ANZ, who maintained their full-year growth forecast of 7.2%, have a stronger view.

 

"With domestic demand remaining soft and disinflationary risks on the rise, we maintain our forecast of two, 25-basis-point cuts in benchmark market interest rates, one in the fourth quarter of 2014 and one in the first quarter of 2015," they said in a note, arguing such a move was needed to bring financing costs down more forcefully.

 

A sagging housing market, sluggish domestic demand and erratic exports have dampened Chinese activity this year.

 

While exports have recently shown signs of picking up, the property market and investment continue to cool and many companies are being pinched by tighter credit.

 

Weak inflation and capacity utilisation also point to an economy that still has far too much excess capacity.

 

Indeed, Reuters data showed that the wobbly economy has prompted Chinese companies to freeze expansion plans and cut their investment by the most since the global crisis as they hunker down for more austere days ahead.

 

FOR BEIJING, EMPLOYMENT IS KEY

 

Chinese officials have indicated they would be willing to tolerate slightly slower growth as long as the jobs market continues to hold up, which would argue against the need for the central bank to take more forceful measures such as rate cuts.

 

Keeping the labour market healthy is a top policy priority for Chinese leaders, who fear that widespread unemployment could stir social unrest.

 

The flash PMI employment sub-index, although still indicating a contraction for the 11th straight month, posted a substantial improvement that was largely responsible for the higher headline figure, said Julian Evans-Pritchard, an economist at Capital Economics, in a research note.

 

"The breakdown suggests that although healthy export demand continues to support the manufacturing sector, cooling domestic demand remains a drag," Evans-Pritchard said.

 

"Nonetheless, we think that healthy employment and wage growth, along with concerns over mounting credit risks, mean that policymakers will avoid rolling out significant stimulus in response to the continued slowdown."

 

There have been no reports of major layoffs, although some firms, particularly state-owned companies, may be reluctant to be seen shedding staff. The HSBC survey tends to focus more on small and mid-sized companies.

 

BOTTOMING OUT?

 

While growth is unlikely to accelerate in the fourth quarter, the flash PMI indicates it may at least be levelling off, some analysts said.

 

"If the flash PMI is right, then October is going to be almost the same as September, slightly better - that would be industrial production growth of about 8% - which suggests that at least it's not getting worse, that growth has stabilized at this quite subdued level," said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong.