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China's factory activity contracts more than expected

October 31, 2021

A key indicator of the health of the Chinese economy, the Purchasing Manger's Index (PMI) contracted. Analysts say the indicators of stagflation in the Chinese economy are there.

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Employees during lunch break at an auto plant of Dongfeng Honda in Wuhan in China's central Hubei province at the start of the pandemic
Employees during lunch break at an auto plant of Dongfeng Honda in Wuhan in China's central Hubei province at the start of the pandemicImage: AFP

China's factory activity contracted more than analysts anticipated in October for a second month as raw material prices remain high and domestic demand stays low due in part to uncertainty brought on by the pandemic, the National Bureau of Statistics (NBS) said Sunday.

COVID-19 returned officially in October, especially in northern China. The resulting decline in economic activity could further hamper the services sector because of tough restrictions to contain outbreaks.

The combined official measures point to increased economic instability in the last quarter of 2021 after a year of steady decline this year, in no small measure due to the pandemic.

This September, factory output was at its lowest since the pandemic began due to power rationing, the increased cost of raw materials, and environmental regulation.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, told Reuters: "These signals confirm that China's economy is likely already going through stagflation."

What do the numbers say?

The official manufacturing Purchasing Manager's Index (PMI) was down 0.4 from September when 0.1 growth was expected.

By contrast, the official non-manufacturing PMI in October eased slightly to 52.4 from 53.2 in September. The official October composite PMI, which includes both manufacturing and services activity, stood at 50.8, down from September's 51.7.

The subindex for production declined to 48.4 in October from 49.5 in September and the subindex for new orders also dropped for a third month to 48.8.

The subindex for output prices increased to 61.1, the highest since 2016 when the statistics bureau started publishing the indicator, which suggests inflationary pressures as economic growth putters.

Calls for policy easing

Zhang Liqun, an analyst at the China Logistics Information Center, said, "About one-third of the surveyed companies listed insufficient demand as their biggest difficulty."

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Zhou Hao, a senior economist at Commerzbank, said, "Production remains weak, indicating the demand problem may be relatively large, and some easing of policy is still needed."

And Tommy Xie, of OCBC Bank, suggested that smaller companies are "paying the price for the power shortages" and need more policy support.

ar/aw (AFP, Reuters)