China's factory activity shrinks in October, third contraction in four months

By Liangping Gao, Yukun Zhang and Ryan Woo

BEIJING, Oct 31 (Reuters) - China's factory activity dropped in October, its third contraction in four months, a government survey showed on Saturday, hurt by soft demand goods at home as well as signs of weakness in exports.

Economists called on the government to do more to support growth after the figures, which highlighted how exports, which have powered higher for much of this year, may not have sufficient strength to offset long-stagnant consumer spending.

"Insufficient demand is increasing downward pressure on the economy," said Zhang Liqun, an analyst with the China Federation of Logistics & Purchasing.

The official manufacturing purchasing managers' index (PMI) fell to 49.3 from 50.1 in September, according to data from the National Bureau of Statistics. That missed a forecast for 50.0 from a Reuters poll, though the first month of a quarter is typically the weakest.

China's trade surplus with the world is on track to top last year's $1.2 trillion due to strength in exports. But in October, factory activity weakened as overseas Christmas-related orders, which were front-loaded in September, cooled. It was also hurt when consumer spending, which climbed during China's long National Day holiday in the first week of October, fizzled out afterwards.

Sub-indexes for new orders overall and for new export orders both stayed in contraction territory in October. Production and purchasing activity also slipped into contraction from expansion.

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Zhang Zhiwei, chief economist at Pinpoint Asset Management, said that if external demand weakens in 2027, "China will need more significant policy support to boost domestic demand."

Lu Zhe, chief economist at Soochow Securities, called for expanding subsidies for mortgage interest payments "to shore up household confidence and anchor sentiment."

He added that extending subsidies for loan interest payments to investment projects would help alleviate the current shortage of viable fixed-asset investments.

The non-manufacturing PMI, which covers services and construction, also dropped, to 49.7 from 50.2 in September.

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The readings are compiled based on purchasing managers' reports about whether conditions improved, worsened or were unchanged in areas such as new orders, output and employment compared with the previous month. A reading above 50 signals expansion, while one below 50 indicates contraction.

Some sectors within manufacturing were doing well.

Production and new orders sub-indexes for railway, shipbuilding, aerospace equipment, and computer, communications and electronics manufacturing were all at or above 53.0, the survey showed.

AI-related firms in particular have reported strong earnings growth. Zhongji Innolight 300308.SZ, a maker of high-speed optical modules that connect servers and switches in AI data centres, posted a near tripling in third-quarter net profit.

But the lacklustre domestic market and rising costs have weighed on many old-school manufacturers and property-linked firms. Custom furniture maker Oppein Home 603833.SS, for example, saw net profit plunge 80% during the quarter.

China's economy is, however, expected to meet the country's 4.5-5.0% annual growth target without additional stimulus measures after third-quarter growth rebounded to 4.5% from 4.3% in April-June.