Manufacturing contracts after previous rally

China's manufacturing activity retreated in October, reversing last month's rally, while the non-manufacturing PMI also fell.

The official Purchasing Managers' Index, which measures vitality in the manufacturing sector, edged down 0.5 points to 49.3 in October from a month earlier, the lowest level since March, according to data released by the National Bureau of Statistics on Thursday.

A reading above 50 indicates expansion, under 50 is considered contraction.

Zhao Qinghe, a senior statistician at the bureau, said production maintained expansion while market demand had cooled.

The sub-index for production tumbled 1.5 points to 50.8, though remaining in expansion territory, indicating manufacturing production continues to expand but at a slower pace.

Of 21 industries surveyed, the production sub-indexes for 13 were in the expansion range. The textile and clothing sector, paper printing, chemical fiber, rubber and plastic products, special equipment and computer communication equipment industries were all above 55.

The new orders sub-index which reflects market demand also fell 0.9 points to 49.6 in October.

Meanwhile, the sub-indexes for new export orders and imports both rebounded 0.6 points from a month earlier each, to 46.9 and 47.4, respectively, though remaining in contraction.

The new export orders sub-index also fell in October, to 47.0 from 48.2 in the previous month, "weighed on by existing higher US tariffs on the US$380 billion worth of Chinese products, the slowdown in global manufacturing and continued tech downswing," according to Lu Ting, chief China economist at Nomura.

The raw materials inventory sub-index edged down to 47.4 last month from 47.6 in September.

The PMIs of both large and small Chinese firms fell to 49.9 and 47.9, respectively, in October compared with 50.8 and 48.8 the previous month. The PMI of medium-sized enterprises edged up marginally by 0.4.

"Not all segments are export-oriented firms, especially for smaller and medium enterprises, which we think are more domestically oriented rather than external," said Xing Zhaopeng, China markets economist at ANZ Group.

"The progress of the US-China trade talks is no longer a cyclical driver of the Chinese economy’s growth momentum, as the domestic economy dominates the outlook," Xing said.

The bureau's non-manufacturing PMI, also released today, retreated 0.9 points from a month earlier to 52.8 in October, but still remained in expansion.

The fall in its sub-index for the services sector, which was down to 51.4 in October from 53.0 in September, more than offset the rise in its sub-index for construction to 60.4 from 57.6, Nomura said.

"The official non-manufacturing PMI remains well above the manufacturing one, indicating growth continues to rebalance toward the tertiary sector amid the economic slowdown," Lu said.

The sub-index of operational activity expectations rebounded 1 point to 60.3, indicating services companies maintain a stronger confidence in the Chinese market, Zhao said. Railways, aviation, postal services, banks and insurance companies were all higher than 65.

The overall PMI output index — the combined manufacturing production index and the non-manufacturing PMI — edged down 1.1 points to 52.

"Given strong growth headwinds, especially from exports and the property sector, and still elevated US-China trade tensions, we expect the official manufacturing PMI to remain sluggish in coming months, the growth slowdown could gather pace, and markets could become more volatile in coming months," Lu said. 

"We maintain our forecast that real GDP growth will likely slow to 5.8 percent year on year in the fourth quarter from 6 percent in the third, and Beijing will likely ramp up its policy easing or stimulus measures in coming quarters to stabilize market sentiment and bolster growth."