China factory PMI witnesses decline in October, remains above 50-point threshold mark

China’s Official manufacturing purchasing managers’ index (PMI) fell to 51.6 in October from 52.4 in September. It was, however, still at the average level for January-September. New orders dropped to 52.9 from 54.8, while production edged lower to 53.4 from 54.7.

The moderation, in part, was the result of week-long holidays and a slowdown in industries cutting production to reduce air pollution ahead of the Party Congress. Meanwhile, it could also be attributed to regulators’ drive to rein in financial risks. Last month, short-term corporate loans contracted by RMB52 billion, the first decline since October 2016. Entrusted loans also registered a 47 percent fall on a yearly basis.

Looking ahead, tightening credit and rising borrowing costs will continue to weigh on activities. Adding to the pressure is the anti-pollution campaign. According to the Ministry of Environmental Protection, new measures will be introduced in Beijing, Tianjin, Hebei, Henan, Shanxi, and Shandong to tackle winter air pollution. That will likely result in production disruptions.

Fears of winter shortages will keep commodity prices at relatively high levels. Elevated PPI, in turn, lowers real interest rates and boosts industrial profits. This, together with the uptick in CPI inflation in Q3, suggesting that the People's Bank of China will maintain its prudent and neutral monetary policy stance.

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