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China factory activity contracts for third straight month

Nov. 2nd, 2015  07:28 AM  Source:FT Chinese

Manufacturing activity in China contracted for the third consecutive month in October, in the latest sign of the country’s economic slowdown.

The official manufacturing purchasing managers’ index, a closely watched gauge of large-scale industrial activity, came in at 49.8 in October, according to data released on Sunday.

That was the same figure as September, implying some stabilisation, although any reading below 50 implies that the sector is shrinking.

“Because of the recent weak recovery of the global economy and the downward pressure in the domestic economy, the import and export situation for manufacturers is still grim,” Zhao Qinghe of the National Bureau of Statistics of China said in a statement.

China’s vast industrial sector is a key driver of economic growth at home and a big consumer of the world’s raw commodities.

It has been struggling because of slack domestic demand and overcapacity, contributing to falling international commodity prices and fears about the prospects for the global economy.

China’s Communist leadership says it wants to restructure the economy to be less reliant on investment in heavy industry and other capital-intensive sectors and more driven by innovation and consumption.

But the scale of the economic slowdown and worries about job losses and bankruptcies have pushed the government to focus on the short-term challenges.

The central bank has cut interest rates six times in the past year in an attempt to boost the economy, which is forecast this year to grow at its slowest annual pace for a quarter of a century.

Gross domestic product grew 6.9 per cent year-on-year in the third quarter, which was down from 7 per cent in the first two quarters but above economists’ expectations of 6.7 per cent.

Liu Li-Gang and Louis Lam, economists at ANZ in Hong Kong, said that while the PMI had stabilised, it was too early to know if the manufacturing sector was reaching a turning point.

“However, expansionary fiscal policy and further eased monetary policy should help engineer a modest rebound in the fourth quarter and the first quarter of 2016,” they wrote in a note to clients.

The data showed that industrial profits declined just 0.1 per cent year-on-year in September, compared with an 8.7 per cent drop in August.

But ANZ argued that this improvement was largely because of temporary factors such as tax relief and that the sector will continue to face strong headwinds.

In response, economists expect the People’s Bank of China, the central bank, to continue steadily reducing interest rates and boosting liquidity by reducing the share of customer deposits that banks must hold in reserve.