China’s Factory Outlook Dims Again as Trade Uncertainty Lingers

(Bloomberg) --

A gauge of the outlook for China's manufacturing sector dropped to the lowest level since February, underlining the uncertainty faced by businesses struggling with weak domestic demand and the trade war with the U.S.

The manufacturing purchasing managers' index fell to 49.3, according to data released by the National Bureau of Statistics on Thursday. That's worse than the 49.8 forecast in a Bloomberg survey of economists. The non-manufacturing gauge was 52.8, lower than forecast but above the 50 level that divides expansion from contraction.

After a bruising third quarter, the chances for stabilization in China's manufacturing sector hang on the success of months of government stimulus efforts and a confidence boost from a partial trade deal with the U.S. slated for November. While the timing of that meeting is now in question following Chile's cancellation of a regional leaders' summit, both sides appear committed to easing tensions.

“The China-U.S. trade war remains the main factor dragging on industrial production, while the long holiday break in the month also contributed to the decline,” Yao Shaohua, an economist at ABCI Securities Co. Ltd in Hong Kong. “Monetary policy doesn't have much room for easing and fiscal policy has been doing a lot. Whether production can improve in the future still depends on how the trade talks go.”

See the breakdown of the data here

A sub-index gauging new export orders started falling again, dropping further into contraction at 47.0, while the sub-gauge for output was at the lowest since February. A gauge of imports also fell, underlining the weakness in domestic demand.

What Bloomberg's Economists Say..

“China's manufacturing sector continues to struggle, with the PMI slipping deeper into contraction in October. But the silver lining is that the drop in the headline PMI did not go beyond a seasonal dip, suggesting there has been no dramatic loss of growth momentum.”

-- Chang Shu, Chief Asia Economist and David Qu, Economist

For the full note click here

The worse-than-expected outcome raises pressure on policy makers as the Communist Party concludes a key political gathering this week. Officials have tried to stick with limited stimulus for fear of reigniting debt growth, an approach that's being tested as the economy looks set for sub-6% expansion next year.

Policy makers have pinned hopes on investment in infrastructure as a way to put a floor under the economy. The construction index in October's PMI data picked up to 60.4, back to “high-level expansion territory”, according to the NBS statement.

As Chinese companies seek signs of stabilization, evidence of that may be emerging elsewhere in the region. South Korea's semiconductor inventories fell the most in more than two years in September, signaling a potential end to a prolonged slump in tech demand that has weighed on global growth. Japanese industrial output rebounded more than expected.

Chinese output in the third quarter expanded 6% from a year ago, the slowest pace since the early 1990s, with the slowdown in investment growth a concern. A set of early indicators for activity collated by Bloomberg showed that trend continuing in October.

Both the manufacturing and non manufacturing PMIs are “so disappointing,” and growth stabilization seems to be a priority if the authorities want to secure 6% economic growth in the fourth quarter, Raymond Yeung, chief Greater China economist with Australia & New Zealand Banking Group Ltd. in Hong Kong. “A rate cut can be a quick measure to manage some sentiment especially if people are worried about the cancellation of APEC in Chile affecting the signing of Phase One deal.”

To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net;Tomoko Sato in Tokyo at tsato3@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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With assistance from Bloomberg