China’s Factory Sector Contracts Again, Pressuring Beijing’s Stimulus Strategy

Gerik

Summary:

China’s manufacturing PMI dropped to 49.0 in October, marking the seventh straight month of contraction and prompting renewed debate over the effectiveness of current fiscal and industrial policies....

Weak Factory Output Extends Into Seventh Month as Policy Gaps Persist

China’s industrial sector continued its prolonged slowdown in October, as the official manufacturing Purchasing Managers’ Index (PMI) fell to 49.0, its lowest reading in six months and below both the 50.0 expansion threshold and the 49.6 forecast in a Reuters poll. This marked the seventh consecutive month of contraction, reinforcing investor concerns about fading economic momentum and insufficient domestic demand.

The PMI decline contrasts with modest growth observed in September’s hard data, such as industrial output and corporate profits. However, analysts caution that such indicators may be artificially inflated by contributions from large state-owned enterprises, masking the distress faced by smaller private-sector manufacturers.

Manufacturing Woes Amplify Structural Pressures

Zhiwei Zhang of Pinpoint Asset Management pointed to the continued drag from China’s weakened property sector, which has depressed construction-related demand and household confidence. Despite earlier expectations for recovery in 2025, the lack of decisive fiscal action has failed to reverse this downward trajectory. Analysts like Xu Tianchen from the Economist Intelligence Unit expected stabilization or slight improvement in October due to expected stimulus, but the disappointing PMI reading suggests that policy tools have yet to gain traction.

The non-manufacturing PMI, which captures activity in the service and construction sectors, rose marginally to 50.1, barely signaling expansion. This narrow gain underscores the fragile balance across sectors and the economy’s overall dependence on policy-driven investments rather than organic demand growth.

Global Trade Tensions and Pricing Pressure Complicate Recovery

Amid China’s attempts to diversify away from US markets following a trade war with the Trump administration, exporters have turned to new destinations in Europe, Latin America, the Middle East, and Africa. However, many producers now find themselves forced to compete by undercutting prices, leading to razor-thin margins or outright losses. This dynamic has limited the effectiveness of international trade as a growth buffer and could exacerbate deflationary pressures at home.

The PMI’s sentiment-based methodology captures these headwinds more acutely than backward-looking output data. As such, it reflects both real-time caution among business owners and waning optimism in China’s core industrial heartlands.

Beijing’s Economic Strategy Faces Critical Test

With third-quarter GDP growth slowing to 4.8%, China remains narrowly on track to meet its full-year growth goal of 5%. However, the pace is the weakest in a year, raising doubts about the sustainability of current recovery paths. The ruling Communist Party has recently reaffirmed its commitment to boosting domestic consumption and strengthening industrial resilience during a closed-door meeting that outlined the 15th Five-Year Plan priorities.

Yet many analysts view these pledges as rhetorical rather than reformist. Recurrent reliance on channeling state resources into large firms, while bypassing more fragile private enterprises and households, has led to an imbalanced recovery. China's household consumption as a share of GDP continues to lag global benchmarks by nearly 20 percentage points, a structural deficiency that further diminishes internal demand.

Some observers, such as Dan Wang from Eurasia Group, argue that stimulus levels will be calibrated to just meet annual targets without addressing systemic weaknesses. Others believe that only intensified infrastructure spending likely through policy financing tools or new government bonds could salvage fourth-quarter momentum.

Private Sector May Signal Diverging Trends

Looking ahead, all eyes are on the private-sector RatingDog PMI, scheduled for release on Monday, which is forecast to edge down to 50.9 from 51.2. While still in expansion territory, a decline would mirror the broader malaise and signal limited improvement even among more agile private enterprises.

The continued contraction of China's manufacturing PMI suggests that traditional stimulus levers are losing efficacy. Without more targeted support for consumption and small business growth, the world’s second-largest economy risks entering a period of slow-burning stagnation despite headline growth targets being technically met.

Source: Reuters

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