China's industry back in contraction zone: the consequences may extend beyond the country

After a September upturn, business activity in Chinese manufacturing declined again. The October PMI came in worse than expected: companies reported weakening production and new orders. For global trade, this is a signal about the state of demand in one of the world's largest economies.

China's manufacturing PMI in October was 49.3 points, down from 50.1 in September. Data released on October 31 by the National Bureau of Statistics of China.

The reading fell below the 50-point mark that separates expansion from contraction. The result was also weaker than the forecast of exactly 50 points expected by participants in a Reuters poll.

Both output and new orders declined

The new orders index fell from 50.5 to 49.4 points. The production index fell even more sharply — from 51.7 to 49.8 points. Thus, the September improvement did not stick: both indicators moved into contraction territory.

In an official commentary, the statistics agency linked the deterioration partly to some demand having been satisfied ahead of the holidays in early October, as well as to a complex international environment.

Consequences may extend beyond China

Chinese companies buy raw materials, components, and equipment from suppliers around the world. If the decline in orders proves persistent, it could weaken the need for these purchases and affect the country's trading partners, including European manufacturers.

However, a single monthly reading cannot predict a fall in imports or changes in global prices. October data points to worsening conditions for industry but does not show how long it will last.

Large enterprises holding up better than small ones

The deterioration affected enterprises of all sizes, but large companies kept their PMI slightly above the growth threshold at 50.2 points. Medium-sized enterprises recorded an index of 48.4, and small ones 47.5 points.

There are also differences between sectors. High-tech manufacturing and equipment production remained in expansion territory, while consumer and energy-intensive industries showed contraction. So it would be wrong to speak of a uniform decline across all of industry.

Outside manufacturing the situation also worsened. The business activity index covering services and construction fell from 50.2 to 49.7 points. Services held at exactly 50 while construction dropped to 48 points.

Lower PMI does not mean a recession for the whole economy

The PMI is calculated based on a survey of purchasing managers. It shows how companies assess changes in conditions compared with the previous month: output volumes, orders, employment, and other indicators.

A reading below 50 points indicates contraction in business activity in the surveyed sector, but by itself it does not mean a recession in the overall Chinese economy. That conclusion requires broader data, including GDP dynamics. For now, the October release shows that the recovery in industrial activity remains fragile.