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China's factory sector nears decade-high led by boom in domestic demand, but exports slowed as COVID-19 spike hit US and Europe

Hu Jinli/VCG via Getty Images

  • China’s factory sector activity grew at its fastest rate in almost 10 years in October as its economy saw a boost in domestic demand for travel, leisure, and consumer goods.
  • Asia’s second-largest economy is recovering from the start-of-the-year weakness, but the risk of declining export demand due to surging COVID-19 cases across US and Europe poses a risk.
  • IHS Markit’s latest reading for the manufacturing sector was the highest since January 2011.
  • “Once the markets get through the US election risk event and finally put that risk rear-view mirror, China improving landscape should support the cyclical rotation into China stocks,” said Stephen Innes, chief global market strategist at Axi.
  • Visit Business Insider’s homepage for more stories.

China’s factory activity rose to a near-decade high in October, recovering from the deep slump brought on by the coronavirus pandemic earlier in the year.

The boost in demand was led by a rebound in consumer demand as people spent on travel, leisure, and shopped for goods during the week-long national holiday in October.

The Golden Week holiday saw over 45% of China’s population travel within the country and spend 466.6 billion yuan ($69.5 billion), according to data from China’s Ministry of Culture and Tourism.

That marked a decline of 21% for domestic tourists from the same time last year, but shows that consumption pattern is returning to normal.

IHS Markit’s China Manufacturing Purchasing Managers Index (PMI) posted a reading of 53.6 for October, better than the 53.0 expected by analysts. The result was China’s highest reading since January 2011. 

The PMI is a common gauge to measure business performance and economic direction of trends in an economy. 

During economic downturns, readings as low as 45 are generally considered poor, and during expansion PMIs tend to linger in the mid-50s range. China posted a reading of 51.5 for its manufacturing sector last month, affirming that its economy is on track towards a steady rebound.  

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“To sum up, recovery was the word in the current macro economy, with the domestic epidemic under control,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement. “Manufacturing supply and demand improved at the same time.

However, new export orders fell as foreign demand slowed from September largely due to the second wave of COVID-19 infections across Europe and a third wave in the US, Wang said. 

But positive China data failed to boost the domestic stock market, as COVID-19 cases continue to break records in the US during election week. Britain just announced a new national lockdown, with Belgium, Greece, Austria, and Portugal also reimposing partial or full restrictions this week. 

“A scenario where countries are moving back and forth with restrictions is a nightmare for markets, and dealing with the many levels of uncertainty will be a difficult challenge for investors,” said Milan Cutkovic, market analyst at Axi.

China’s Shanghai Composite was about flat, Japan’s Nikkei rose 1.3%, and Hong Kong’s Hang Seng rose 1.4% at Monday’s close.

“Once the markets get through the US election risk event and finally put that risk rear-view mirror, China improving landscape should support the cyclical rotation into China stocks,” said Stephen Innes, chief global market strategist at Axi.

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