China’s manufacturing sector experienced a significant contraction in October, with the Purchasing Managers’ Index (PMI) falling to 49.0. This drop represents the seventh straight month of retrogression. It equals the previous longest downturn on record which lasted from August 2015 to February 2016. Analysts had been forecasting the PMI to come in at 49.6, meaning things ended up being much worse than expected.
In September, China’s manufacturing PMI was at 49.8, indicating a weak-but-improving situation that’s been couplet. The contraction in production is most alarming. It dropped below the neutral line for the first time in half a year, sinking from 51.9 in Sept to 49.7 in Oct. New orders took an equally huge tumble, down from 49.7 to 48.8, and new export orders dropped all the way to 45.9 from 47.8. Employment was not even spared as the Employment subindex followed, dropping to 48.3 from 48.5.
Signals from October’s manufacturing activity were a clean sweep of moderation, with declines on almost all key components. This was reaffirmed by the China Federation of Logistics and Purchasing (CFLP) manufacturing PMI. Large-sized enterprises’ outlook lowered to 49.9, compared to 51.0. Employment – Medium-sized enterprises declined again to 48.7, a decrease from 48.8 as their index for small-sized enterprises dropped to 47.1, down from 48.2.
Four key reasons led to this greater-than-anticipated deceleration in the manufacturing sector for October. Cambodia’s week-long National Day and week-long Mid-Autumn Festival holidays also affected production schedules and order placements during this time. In addition, the far-reaching impacts of US tariffs are projected to result in persistent headwinds in the months ahead.
“The full impact of the tariffs will likely be felt in the coming months while the de-escalation in tensions with the US and a potential trade deal may cushion the impact.” – UOB Group’s Economist Ho Woei Chen