Chinese manufacturing contracts for third straight month, Caixin PMI shows

(Sharecast News) - China's manufacturing industry contracted in October for the first time in three months, according to the Caixin-sponsored purchasing managers' index released on Wednesday. The manufacturing PMI fell to 49.5 last month, from 50.6 in September, surprising analysts who had expected a pick-up to 50.8.

Readings above 50 indicate expansion, while anything lower represents a contraction in activity. This was the first contraction recorded since July.

Manufacturing production saw a renewed fall, with companies linking cuts in output to muted sales, particularly from abroad, Caixin said. Purchasing activity also fell as firms made greater usage of current stocks to help control costs. Manufacturing employment also continued its recent decline, with the employment sub-index falling to its lowest since May.

Meanwhile, input cost inflation increased to a nine-month high, with firms citing higher prices for raw materials and oil.

"Overall, manufacturers were not in high spirits in October. Supply, employment and external demand all fell, while domestic demand expanded at a slower pace. Costs and output prices both rose, purchases fell, and inventories of finished goods increased. Business optimism continued to wane," said Caixin economist Wang Zhe.

"Many of China's economic data for the third quarter exceeded market expectations. Consumption, especially in the services sector, is resilient. The economy has showed signs of bottoming out, but the foundation of recovery is not solid. Demand is weak, many internal and external uncertainties remain, and expectations are still relatively weak."

The data corresponded with government figures which showed that Chinese manufacturing weakened this month, with the official PMI falling 0.4 points to 49.5 - though the surveys diverged in their readings for new orders and production.

Economist Duncan Wrigley from Pantheon Macroeconomics explained: "The Caixin PMI's above-50 reading for overall new orders indicates a rise in sales, while the official gauge points to a fall. The measures for production are reversed. The Caixin PMI is more weighted towards light industry, the private sector and exporters, likely accounting for the different responses."