Caixin PMI shows China's factory activity expands in October

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China's factory activities in October returned to the expansion field, with the private gauge Caixin Purchasing Managers' Index (PMI) rising to 50.6, an increase of 0.6 points and the highest since June.

The rebound is mainly thanks to rising demand, despite pressure from power and raw material shortages. The reading beats the official manufacturing PMI of 49.2 in October.

Analysts from Caixin Insight Group said downward pressure still exists, as supply strains may continue to affect economic growth. Some suggested remedies include enhancing COVID control, maintaining commodity prices and providing a better environment for smaller businesses.

Jimmy Zhu, chief strategist at Fullerton Research in Shanghai, said power shortage, rising commodity prices and supply chain issues are the main reasons for the official PMI's contraction in a brief analysis of China's key economic indicators for October.

"The substantial declines in inventory index suggested the weakness lies more in supply side rather than the demand side, and the issues may stay for some time given the current global macroeconomic condition," said Zhu.

Zhu added, "Having that said, we expect the policy to lean more towards to tackle the supply-side shortage, rather than those liquidity management tools like RRR cuts. Besides that, easing some of the credit supply could help short-term growth outlook as well.”

He further explained why the official PMI dropped below the dividing line when the Caixin PMI held above 50. "[It is due to] survey samples difference. Caixin (PMI is) more exports oriented, in line with China's export orders and exports data. But the official PMI may express a more accurate picture for the domestic economic condition," he said.

"The recent increasing reopening in global economies strengthen the Chinese external outlook, and that may extend into year-end at least. However, central banks around the world, including the Fed, show bias to tighten the monetary policy, which may bring some hurdles on the global recovery in 2022," said Zhu.