China’s Manufacturing Activity Expands Amid Weak Supply, Caixin PMI Shows

China’s manufacturing activity expanded in October from the previous month as demand recovered although supply remained sluggish amid a power crunch and raw material shortages, a Caixin-sponsored survey showed Monday.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives an independent snapshot of the country’s manufacturing sector, rose to 50.6 in October, up from 50 in the previous month, according to the survey report. A number above 50 signals an expansion in activity, while a reading below that indicates a contraction.

The indicator is closely watched by observers and investors as one of the earliest available monthly barometers of the Chinese economy’s health, especially as analysts warn of a further slowdown in economic recovery in the fourth quarter. In August, the index fell below 50 for the first time since April last year.

The breakdown of the survey last month shows that demand continued recovering as total new orders increased at a faster pace than in September. The upturn was mainly driven by domestic demand because new export orders dropped for the third month in a row.

In contrast, supply became weaker as manufacturing output shrank for the third consecutive month and at a faster clip than in September. “Shortages of raw materials and soaring commodity prices, combined with electricity supply problems, created strong constraints for manufacturers and disrupted supply chains,” said Wang Zhe, a senior economist at Caixin Insight Group.

Logistics delays became widespread, as suppliers’ delivery times increased at the quickest pace since March 2020.

Meanwhile, manufacturers were facing higher inflationary pressure as input costs in October surged at the fastest pace since December 2016. “Raw material and energy prices rose sharply, pushing up manufacturers’ costs. Transportation costs also increased,” Wang said.

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Output prices kept increasing because businesses, especially producers of intermediate products, raised prices to pass their higher costs downstream, according to the survey. Government data showed that factory-gate inflation rose to the highest on record in September.

As output declined, the gauge for quantity of purchases fell to the lowest since February 2020. “Anecdotal evidence indicated that reduced production and high purchasing costs had led firms to cut back on input buying,” according to the survey report. As a result, companies cut their inventories of inputs at the fastest clip in about one and a half years.

Employment shrank slightly due in part to sluggish production in October. Surveyed manufacturers remained generally optimistic about the outlook for output and market demand, but some expressed worries about the supply chains.

“Policymakers should not only take effective measures to stabilize commodity supplies and prices, but also pay close attention to downstream firms, especially small and midsize ones,” Wang said. He also expected that there will be re-emerging economic disruptions due to a new wave of Covid-19 outbreaks in a number of regions since late October.

Regulators have been working to stabilize energy prices and shore up supplies. The National Development and Reform Commission, China’s top economic planning body, has made efforts to rein in coal prices and urged coal producers to boost output.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Bertrand Teo (bertrandteo@caixin.com)

Read more about Caixin’s economic indexes.

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