Dow Jones Newswires: China manufacturing drops to 8-month low

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Chinese manufacturing activity fell to an eight-month low in October, an official gauge showed, raising another warning signal as hopes for a U.S.-China trade truce were dealt a further blow.

China’s official gauge of factory activity, the manufacturing purchasing managers index, dropped to 49.3 in October from 49.8 in September, the National Bureau of Statistics said Thursday.

The index has stayed below the 50 mark, which separates expansion from contraction, for six straight months, indicating worsening business sentiment despite the government’s efforts to spur economic growth.

Economists were expecting factory activity to have held steady this month, partly due to easing trade tensions between China and the U.S. But the cancellation of a summit of Asia-Pacific Economic Cooperation members has complicated efforts by the world’s two largest economies to sign a limited trade agreement designed to keep new tariffs at bay.

Even if a partial trade deal were reached, that alone probably wouldn’t help China’s economy in the absence of other policy supports, said Serena Zhou, an economist at Mizuho Securities.

“The latest PMI again proved that China’s economy is under notable downward pressure,” Ms. Zhou said. “I don’t think an interim trade deal in November can quickly turn the situation around.”

The drop in manufacturing activity adds pressure on Beijing policy makers, who are seeking to juice economic growth while taming inflation expectations.

Policy easing by other global central banks could push the People’s Bank of China to ease more. The Federal Reserve cut interest rates for the third time this year on Wednesday. However, the PBOC also must contend with rising consumer inflation.

Surging pork prices pushed China’s consumer inflation to a near six-year high in September, while China’s producer-price deflation deepened more amid falling raw-material prices and soft demand, latest official data showed.

“Yes, the central bank is under pressure to stabilize [economic] growth, but it seems more worried about heating inflation expectations,” said Yang Weixiao, an economist at Founder Securities.

Weakness in the official factory-activity report was broad-based. A subindex measuring total new orders received by China’s manufacturers decreased to 49.6 in October from 50.5 in September, the statistics bureau said.

New export orders, an indicator of external demand for Chinese goods, fell to 47.0 from 48.2 in September, while import orders tumbled to 46.9 from 47.1 a month earlier. Production also eased to 50.8 in October, compared with 51.9 in September.

Meantime, business activity outside China’s factory gates expanded at the slowest pace in October in nearly four years, as weaker growth among service providers outweighed strength in the construction sector, a separate official gauge showed.

China’s official nonmanufacturing PMI, also released Thursday, dropped to 52.8 from 53.7 in September.

Ms. Zhou of Mizuho said one policy option is for China’s central bank to trim the amount of reserves that banks are required to keep on hand, a move that she said would benefit all lenders equally, including smaller rural ones that have been suffering from higher interbank financing costs in recent months.

On Wednesday, one such bank in central Henan province became the latest lender to spark concern as authorities were forced Wednesday to assure the safety of its deposits following a flurry of withdrawals. At the same time, China’s anticorruption watchdog unveiled an investigation into the bank’s former chairman.

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