Anybody expecting the October rate cut by the People’s Bank of China to spark a turnaround in the Chinese economy is feeling pretty disappointed right now, after the latest Purchasing Managers’ Index (PMI) showed manufacturing activity in October unexpectedly contracted for the third consecutive month and that the services sector also showed that it had begun to cool off.

Released on Sunday, the PMI fed fears that the despite a slew of stimulus measures such as the sixth interest rate cut in a year and the lowering of the amount of reserves that banks need to hold, which would free up funds for new loans, the economy’s gradual slowdown continues. This led many to feel more stimuli will be needed in the coming months.

“As deflation risks intensify, a further ratio reserve requirement cut before end of this year is still possible,” economists at ANZ Bank said in a note, referring to reducing the amount of reserves that banks must hold.

The official October Purchasing Managers’ Index (PMI) came in at 49.8, matching September’s number and lagging expectations of 50.0, according to the National Bureau of Statistics (NBS). A reading below 50 points suggests a contraction.

New export orders contracted for a 13th straight month, although the sub-index for new orders – a proxy for both domestic and foreign demand – edged up marginally to 50.3, compared with 50.2 the previous month.

“Because of the recent weak recovery in the global economy and downward pressure in the domestic economy, manufacturers still face a severe import and export situation,” Zhao Qinghe, a senior statistician at the NBS said in a statement.

Meanwhile, the services sector, one of the bright spots in the economy to offset the weakening manufacturing sector, also took a dip. The official non-manufacturing PMI fell to 53.1 in October from 53.4 in September, according to the NBS.

While a reading above 50 shows activity is expanding, the decline also shows that this part of the economy is beginning to get tired and that consumers are growing more cautious.

At the beginning of the year, the government predicted gross domestic product would grow 7% this year, and for the first two quarters of the year, things were on track. However last week, the government reported that third-quarter growth had slipped to 6.9% for the first time since the fiscal crisis and the latest reports signal that the fourth quarter could also come in lower than expected.

Leave a comment