Activity in China’s vast factory sector shrank again last month as demand softened at home and abroad, fueling fears that the world’s second-largest economy might be cooling more rapidly than expected just a few months ago.
Similar private surveys also showed growing strains on smaller and medium-sized manufacturing and service companies which are at the heart of China’s economy, providing most of its jobs and 60 percent of its GDP.
Activity at larger, state factories shrank for a second straight month, albeit at a slower pace than in August, while smaller manufacturers reported the worst conditions in six-and-a-half years and falling export orders pointed to more pain ahead.
“Two straight months of manufacturing sector contraction with a depressed equity market suggests China’s third-quarter GDP growth is likely to have slowed to 6.4 percent,” economists at ANZ said.
Still, there were no signs in the latest surveys that the economy is facing the worst-case scenario of a hard landing and ANZ believes that growth could pick up again later in the year as stimulus measures and higher government spending gradually take effect.
The official manufacturing Purchasing Managers’ Index (PMI) inched up to 49.8 last month from the previous month’s reading of 49.7, but still suggested conditions were deteriorating.
A private survey by Caixin/Markit focusing on small factories pointed to an even sharper cooldown, with the PMI shrinking to 47.2, the lowest since March 2009. Readings below 50 signal a contraction.
“The two PMIs taken together still point to subdued activity in the manufacturing sector,” Capital Economics economist Julian Evans-Pritchard said.
Both the official and private surveys showed manufacturers shed more jobs last month as sales weakened and new export orders continued to contract.
Perhaps more concerning for the government and investors were growing signs of stress in China’s services sector, which has been the lone bright spot for the economy in the last few years, but it too has begun to show signs of fatigue in recent months as consumers grow more cautious.
While larger services firms continued to expand at a fairly solid clip of 53.4 last month, growth for their smaller peers came close to stalling, official and private surveys showed.
The Caixin surveys suggested service sector growth is no longer strong enough to compensate for the growing downdraft from weak manufacturing and investment.
A composite PMI covering both manufacturing and services shrank for the second month last month and at a sharper rate.
The government is due to release third-quarter GDP data on Oct. 19.
Similar activity surveys and data from other trade-reliant Asian economies made for equally grim reading, with Japanese manufacturers seeing a tumble in new export orders, South Korean exports falling for a ninth consecutive month and Taiwan warning that its economy shrank in the third quarter.
Indonesian factory owners cut payrolls at the second-fastest rate in at least four years, while activity in Vietnam fell for the first time in two years.
Even Indian factories, which are more insulated from global trends, posted their slowest expansion in seven months.
The drop in activity is likely to have added to worries over the country’s sputtering growth and reinforced the rationale behind the central bank’s larger than expected interest rate cut this week.
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