'Mounting downward pressure': Chinese companies are doing it tough as new orders dry up

Feng Li/Getty Images
  • Activity levels across China’s corporate sector grew at the slowest pace in over two years in October.
  • New orders increased at the weakest pace in 32 months, hinting the slowdown may persist in the final months of 2018.
  • The slowdown reflects not only trade tensions with the United States but also previous attempts to encourage deleveraging across China’s corporate sectors.

Chinese businesses are struggling in late 2018.

Demand is soft, new orders are weak and margin pressures persist, leading to a decline in sentiment towards the year ahead, according to the latest Caixin-IHS Markit China Composite PMI for October released today.

“The Composite Output Index fell from 52.1 in September to a 28-month low of 50.5,” said IHS Markit.

“The slowdown was broad-based by sector with both services and manufacturing noting weaker performances compared to the previous month.

“Notably, manufacturing production stagnated, following increases in each of the preceding 27 months.

“Service sector activity meanwhile rose only marginally, with the seasonally adjusted Caixin China General Services Business Activity Index falling from 53.1 in September to a 13-month low of 50.8.”

IHS Markit

The composite PMI measures changes in activity levels across China’s manufacturing and services sectors from one month to the next. A figure of 50 means activity levels were unchanged with the distance away from this level indicating how fast activity levels improved or deteriorated from a month earlier.

Last month, the improvement was negligible for services firms while activity levels for manufacturers stalled, resulting in the composite PMI tumbling to the lowest level in over two years.

Suggesting those trends may persist in the months ahead, IHS Markit said new orders — regarded as a lead indicator on activity levels in the future — remained weak in October.

“The softer increase in services activity coincided with the first stagnation of new business for nearly ten years in October,” the group said.

“At the same time, new orders placed with goods producers rose only slightly, following broadly no change in the previous month.

“As a result, composite new work increased at a marginal pace that was the weakest in 32 months.”

Zhengsheng Zhong, director of macroeconomic analysis at Caixin Insight Group, said the latest report indicates “mounting downward pressure on China‚Äôs economy”.

In the year to September, Chinese economic growth cooled to 6.5%, the weakest pace since the GFC.

Along with continued trade tensions with the United States, the latest slowdown also reflects previous attempts to usher through deleveraging across China’s corporate sector, designed to curb growing financial stability risks following years of strong growth in non-financial sector debt.

In order to stabilise economic conditions, Chinese policymakers have rolled out several supportive measures in recent months, including personal income tax cuts.

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