BEIJING (Reuters) – China’s factory activity declined more in October than expected for the second month in a row, due to persistently high commodity prices and softer domestic demand, indicating greater economic concern in the last quarter of 2021.
The official index of the purchasing manager in production (PMI) was 49.2 in October, which is 49.6 compared to September, data from the National Statistical Office (NBS) showed on Sunday.
The 50-point mark separates growth from shrinkage. Analysts had expected it to reach 49.7.
China’s expanded manufacturing sector has been steadily slowing this year, with production growing at its weakest pace since September 2020 due to environmental constraints, electricity rationalization and higher raw material prices.
According to the softer PMI heading, the manufacturing sub-index slipped to 48.4 from 49.5 in September. The sub-index for new orders also shrank in the third month, reaching 48.8.
“About one-third of the companies surveyed cited insufficient demand as their biggest problem, indicating that inadequate demand has limited their production,” said Zhang Liqun, an analyst at the China Logistics Information Center.
More worryingly, the industrial product price sub-index has risen to 61.1, the highest since 2016 when the statistical office began publishing the indicator, indicating rising inflationary pressures while broader economic growth is slowing.
“The production index has fallen to its lowest level since it was published in 2005, excluding the period of the global financial crisis in 2008/09 and the outbreak of COVID in February 2020,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“The producer price index has risen to its highest level since it was published in 2016. These signals confirm that the Chinese economy is probably already experiencing stagflation.”
Factory inflation rose to a record high last month due to rising commodity prices, but weak demand has curbed consumer inflation, leaving policymakers on a tightrope between supporting the economy and further boosting producer prices.
Analysts polled by Reuters expect the People’s Bank of China to refrain from trying to boost the economy by reducing the amount of cash that banks have to keep in reserve until the first quarter of 2022.
“Production remains weak, suggesting that the demand problem may be relatively large, so some policy easing is still needed,” said Zhou Hao, a senior economist at Commerzbank.
The official PMI for non-productive activities fell slightly to 52.4 in October from 53.2 in September, when services returned to expansion at the end of a summer full of COVID.
New COVID-19 clusters returned in October, especially in the north, which could again disrupt economic activity and cause a new blow to the service sector due to strict restrictions on disease containment.
“Because of the impact of the epidemic and the weather, consumers were more inclined to spend a vacation at home or travel short distances,” Zhao Qinghe, a senior NBS statistician, said in an accompanying statement.
While the transport sector, including air and rail services, has expanded, growth has been relatively weak, Zhao said.
China’s official October composite PMI index, which includes both manufacturing and services, stood at 50.8, down from 51.7 in September.
(Reported by Ryan Woo and Gabriel Crossley; edited by William Mallard and Richard Pullin)