China Manufacturing Contracts for Second Successive Month

The official NBS Manufacturing PMI for China unexpectedly fell to 49.2 in October 2021 from 49.6 a month earlier, falling short of market expectations of 49.7. The official NBS Manufacturing PMI for China unexpectedly fell to 49.2 in October 2021 from 49.6 a month earlier, falling short of market expectations of 49.7.

In the wake of the Delta variant of COVID-19 outbreaks, higher material costs, power shortages, and a campaign to reduce carbon emissions, factory output fell for the second consecutive month, with new orders falling to 48.8 from 49.3 in September and export sales falling to 46.6 from 46.2, according to the National Bureau of Statistics.

Firms also lowered their purchasing activity even more (48.9 vs. 49.7), while employment fell for the seventh consecutive month and at an even higher pace (48.8 vs 49.0). In terms of pricing, input costs increased at the fastest rate in five months (72.1 percent against 63.5 percent), accompanied by an increase in selling prices (61.1 vs 56.4).

Looking forward, mood has deteriorated for the seventh consecutive month (53.6 vs 56.4). It was reported that the official NBS Non-Manufacturing PMI for China fell to 52.4 in October 2021, from 53.2 the previous month. While isolated COVID-19 breakouts continue, the latest report indicated that the service sector had grown for the second consecutive month in August.

Orders were down for the fifth consecutive month (49.0 in September, down from 49.0 in August), with new export orders (47.5 in September, down from 46.4 in August) and employment (47.5 in September, down from 47.8) both continuing to decline. Input cost inflation advanced considerably (57.9 percent vs 53.5 percent), while selling prices grew for the second month in a row and at a greater pace than in the previous month (52.7 vs 50.5).

Last but not least, confidence fell to a nine-month low, although it remained optimistic (58.8 vs 59.1). In the previous session, the offshore yuan fell to a low of 6.3870 per US dollar, as allegations that state-owned banks were buying dollars in the spot market caused a sharp decline in the value of the Chinese currency.

The yuan, on the other hand, was supported by the dollar’s weakening versus key currencies, which coincided with increased expectations for quicker rate rises outside the United States. Chinese government bonds were also included in the FTSE Russell flagship World Government Bond Index on Friday, offering support to China’s currency by drawing inflows of international cash.

Using seven-day reverse repos with an interest rate of 2.2 percent, the People’s Bank of China injected a total of CNY 200 billion into the financial system for the fifth consecutive day on October 29th 2021, aiming to offset the impact of tax hikes and government bond issuance payments while maintaining liquidity stability.

After injecting a net CNY 940 billion into the banking system since October 20th, the People’s Bank of China (PBoC) has done so for the first time since January 2020, a clear indication that policymakers are ready to support growth and keep liquidity stable for businesses to cope with corporate tax payments and local debt issuances without inherently loosening monetary policy.