Chinese manufacturing shrinks more than expected on trade woes

China’s factory output growth slowed significantly more than expected in October, as its drawn-out trade war with the United States and weakness in global and domestic demand weighed on many segments of the world’s second-largest economy.

Industrial production rose 4.7 percent year-on-year in October, data from the National Bureau of Statistics released on Thursday showed, below the median forecast of 5.4 percent growth in a Reuters poll and slower than September’s 5.8 percent.

Indicators showed other sectors also slowed significantly and missed forecasts. Retail sales growth fell to a nearly 16-year trough and fixed asset investment growth – the change in the amount companies spend on long term assets such as land and equipment – was the weakest on record.

The disappointing numbers show China is set for a rough final three months of 2019 and will bolster calls for Beijing to roll out fresh support measures. Third-quarter growth slowed to its weakest pace in almost 30 years, with factory production bruised by the trade war with Washington, the government said last month.

Asian stocks fell after the softer-than-expected data, which reinforced concerns the trade war was hurting one of the world’s largest drivers of economic growth.

“These data support our view that growth headwinds remain strong and the economy has yet to hit bottom,” Japanese bank Nomura said in a research note, adding that gross domestic product (GDP) growth is expected to slow to 5.8 percent in the fourth quarter from six percent in the third quarter.

Broad activity in China’s factory sector remained weak in October with producer prices falling at their fastest pace in more than three years and manufacturing activity mired in contraction for a six straight month, recent indicators showed.

Thursday’s data showed the value of delivered industrial exports fell 3.8 percent on-year in October, marking the third straight month of declines.

China’s steel output fell to a seven-month low in October while cement production contracted for the first time in more than a year, compared with a year earlier.

The tariff war between China and the US has hit global demand, disrupted supply chains and upended financial markets.

Other important trading powers have also felt the blow from the dispute, with Japan’s economy grinding to a near standstill in the third quarter, posting its weakest growth in a year.

While some signs of recent progress in trade negotiations between the superpowers have cheered financial markets, officials from both sides have so far avoided any firm commitments to end their dispute.

That uncertainty has weighed persistently on manufacturers and their order books in recent months and raised doubts about the prospects of any breakthrough.

“Even if a minor deal is agreed upon in the coming months, this would merely allow the focus to shift to the more intractable issues that we think will eventually lead the trade talks to break down,” Capital Economics China Economist Martin Lynge Rasmussen said.

Record-low investment

Fixed asset investment, a key driver of economic growth, rose just 5.2 percent from January to October, against expected growth of 5.4 percent and the weakest pace since Reuters records began in 1996.

Infrastructure investment rose 4.2 percent in the first 10 months, slowing from a 4.5 percent gain in January-September.

In a bid to stop this trend, China’s State Council on Wednesday pledged to encourage more spending on infrastructure projects.

At the same time, local governments are facing increasing fiscal strains as tax cuts and the broader slowdown reduce revenues, hampering the big infrastructure projects Beijing needs to revive growth.

Meanwhile, China’s property investment and sales growth eased to three-months lows in October, suggesting a critical pillar of the economy is softening.

Retail sales rose 7.2 percent year-on-year in October, missing expected growth of 7.9 percent and matching the more than 16-year low hit in April.

Consumers have been hit with higher food prices over the past few months, as pork and other meat prices soared. In October, they bought fewer garments, jewellery and cars compared to a year earlier.

Support on the way

To prop up growth, China’s central bank this month cut the interest rate on its one-year medium-term lending facility loans, a key policy rate, for the first time since early 2016.

Analysts said the cut, while modest, may be a sign the central bank is becoming more proactive and looking to ease worries that higher inflation will prevent it from delivering fresh stimulus.

“Economic performance still faces a fairly large number of risks and challenges and these cannot be underestimated. In the next stage, we will … continue to fully implement counter-cyclical adjustment policies,” statistics bureau spokeswoman Liu Aihua told reporters in a briefing.

Earlier this week, Premier Li Keqiang flagged the need for the more effective use of economic support tools, including the issuance of special local government bonds.

In a front-page editorial on Thursday, the state-owned Securities Times said authorities should tolerate longer-term increases in China’s debt levels relative to the size of the economy.