China’s official manufacturing Purchasing Managers’ Index (PMI) recorded a contraction in activity (49.2) in October 2022, down from the very modest expansion (50.1) indicated in September 2022. Rising COVID-19 cases, further contraction in construction, and a possible contraction in export demand means this weakness will likely continue.

The 50-point mark differentiates growth from contraction. “The reading dropped in October due to more frequent flare-ups of COVID-19. Economic recovery needs further consolidation,” NBS senior statistician Zhao Qinghe was quoted as saying by Chinese media reports.

China’s official manufacturing PMI recorded a contraction in activity (49.2) in October, down from the very modest expansion (50.1) indicated in September. Rising COVID-19 cases, further contraction in construction, and a possible contraction in export demand means this weakness will likely continue. New export orders remained in contraction.

The purchasing price index of major raw materials rose by 2.0 points to reach 53.3, while the factory-gate price index surged by 1.6 points compared to last month to stand at 48.7, NBS data revealed.

For the manufacturing PMI, almost every sub-index fell from last month’s reading. The exception to this was for raw material prices, which means even thinner profit margins for manufacturers, according to an article by Iris Pang, Dutch financial services company ING’s chief economist, Greater China. New orders were weaker, hinting at a further fall in activity levels in the coming months. New export orders remained in contraction, but slightly less so than last month. That makes it very hard to be optimistic about either manufacturing or exports for November and December.

“All in all, October looks to have been a weak month for the economy, and November looks as if it will be no better than October. Compounding this is the fact that COVID-19 cases are climbing again, and further small-scale lockdowns in China seem possible. A contraction is also expected in export demand in the coming months reflecting the weakening external environment,” the ING article said.

But adding to the gloom, the retail sector was also weaker, even though the first week of October was the Golden Week holidays. As a result, retail sales are anticipated to be very soft in October.

The CNY is expected to weaken further in the short term given the apparent weakness of the economy. Together with more COVID-19 cases and expected lockdowns, it becomes even more difficult to be upbeat about the yuan.

But the central bank does not want the CNY to weaken too fast. With the recent increase in macro-prudential parameters for cross-border finance, it is expected that demand for the yuan should increase when USDCNY gets close to 7.4. It is therefore possible that the yuan will remain range-bound between 7.2 and 7.4, Pang added.

Fibre2Fashion News Desk (NB)