China manufacturing data adds to mounting worries about economy

Factory activity in October sinks to the lowest since July 2016

An official gauge of activity in China’s manufacturing sector slipped to a more than two-year low in October, as worries about an escalating trade dispute with the U.S. compounded concerns about a slowdown in the Chinese economy.

The official manufacturing purchasing managers index dropped to 50.2 in October from 50.8 in September, according to data released by the National Bureau of Statistics Wednesday.

Though readings above 50 still indicate an expansion in activity, the fall was more precipitous than economists projected, with the October reading at the lowest since July 2016.

“Overall, the data confirms that economic fundamentals are weakening. I’m afraid the softness will remain for a long period of time,” said Yang Weixiao, an economist at Founder Securities.

Indicators and other economic data in recent weeks have shown that the Chinese economy is slipping faster than many officials expected, spurring the government to move to support growth and talk up the stock markets.

Asian markets, buoyed by a rebound on U.S. exchanges overnight, appeared to shrug off the fall in factory activity, with shares in Shanghai falling initially and then rising by midmorning Wednesday, October 31, 2018.

A weeklong national holiday and rising uncertainties about conditions outside of China were among the reasons for the slower expansion in factory activity, said Zhao Qinghe, an analyst with the government’s statistics bureau, in a statement accompanying the data release.

Mr. Yang and other economists pointed to signs of further gloom in the latest indicators. A subindex measuring production decreased to 52.0 from 53.0 in September, while the new orders index fell to 50.8 from 52.0. The new export subindex—an indicator of external demand for Chinese goods—slipped to 46.9 from 48.0.

Subindexes measuring operations of small- and medium-size manufacturing firms showed a contraction in activity in October from September. That was likely the result of regulatory rules released in July aimed at curb rising financial risks from nonbank lenders and that basically cut off the primary funding source for private firms, said Mr. Yang.

An official gauge of business activity outside factories, also released Wednesday, pointed to fresh weakness in the service sector, which has been more buoyant. China’s official nonmanufacturing PMI dropped to a 14-month low of 53.9 in October from 54.9 in September.

Beijing in recent months has stepped up its efforts to boost economic growth by jump-starting infrastructure projects and releasing more funds for banks to lend. Several regulators have increased credit support to relieve private firms’ financing difficulties. The authorities have also pledged reductions in tax and fee burdens.

The government’s efforts to stabilize economic growth and bolster expectations should start to show effects late this year, said Zhang Liqun, an analyst with the China Federation of Logistics and Purchasing, according to a statement on the group’s website. The industry group releases the PMIs with the statistics bureau.

Mr. Yang of Founder Securities said banks have enough money but the cash still isn’t being disbursed to small firms, which are seen as riskier. “If the system doesn’t repair itself, it’s hard to imagine things could improve anytime soon,” he said.