China factory activity stumbles as export orders dry up

China Factory Activity Stumbles as Export Orders Dry Up A Wake-Up Call for Policymakers?

For a seventh consecutive month, China's factory activity contracted in October, underscoring the country's persistent economic challenges. The official purchasing managers' index (PMI) fell to 49.0 in October from 49.8 in September, a six-month low. This decline is attributed to a sharp drop in new export orders, as the temporary boost from front-loading to beat United States President Donald Trump's tariff threats finally wore off.

Policymakers had banked on producers rushing goods to the US to mitigate the impact of tariffs, but analysts warned that this strategy was unsustainable and would eventually lead to a payback. Now, it appears that payback has arrived. Factory owners stepped up efforts to reach new customers in Europe, Latin America, the Middle East, and Africa, but are increasingly selling at a loss with no other markets to absorb anywhere near the $400 billion of goods the US once purchased.

The trade war between China and the US has cast a long shadow over China's economy, causing export growth to slow significantly. Economists estimate that the loss of the US market has cut export growth by around 2 percentage points, or roughly 0.3 percent of GDP. This raises concerns about whether China's $19-trillion economy is on track to hit its official 2025 growth target of around 5 percent.

In a silver lining, the nonmanufacturing PMI rose to 50.1 from 50.0 in September, supported by an uptick in the services sector. However, this increase is not enough to offset the decline in factory activity. The construction component slipped to 49.1 from 49.3 in September, indicating a slowdown in infrastructure investment.

The ongoing trade war between China and the US has been a major drag on China's economy. Despite the recent agreement to de-escalate tensions, the divide between the two superpowers remains significant. This pressure will continue to weigh on China's policymakers as they strive to find a way to help manufacturers mount a sustainable economic recovery.

Key Takeaways

1. China's factory activity contracted for a seventh consecutive month in October.
2. The decline is attributed to a sharp drop in new export orders, as the temporary boost from front-loading finally wore off.
3. Export growth has slowed significantly due to the loss of the US market.
4. Economists estimate that the loss of the US market has cut export growth by around 2 percentage points or roughly 0.3 percent of GDP.
5. China's policymakers will need to find a way to help manufacturers mount a sustainable economic recovery.

What's Next?

China's policymakers are under pressure to find a solution to stimulate the economy and boost domestic demand. Some analysts believe that Beijing doesn't need more stimulus this year, while others see more infrastructure investment as a way to ensure the economy remains on target in the fourth quarter.

As we look to the future, it's clear that China will need to rebalance its economy and shift away from an over-reliance on external demand. The clock is ticking, and policymakers will need to act quickly to avoid a further slowdown.

Conclusion

China's factory activity continues to struggle due to declining export orders, which has significant implications for the country's economic growth and stability. Policymakers will need to find a way to stimulate the economy and boost domestic demand to ensure that China reaches its official 2025 growth target. As we look to the future, it's clear that China will need to rebalance its economy and shift away from an over-reliance on external demand.

Keywords China factory activity, export orders, US-China trade war, economic growth, stimulus, reform.

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Edward Lance Arellano Lorilla

CEO / Co-Founder

Enjoy the little things in life. For one day, you may look back and realize they were the big things. Many of life's failures are people who did not realize how close they were to success when they gave up.