China’s Factory Activity Shrinks at Fastest Pace in Three Months as Demand Cools

China’s factories pulled back in October at the fastest pace in three months, an official survey showed Saturday, as weak demand at home and abroad weighed on the world’s second-largest economy.

The official manufacturing purchasing managers’ index fell to 49.3 from 50.1 in September, missing the 50.0 forecast in a Reuters poll. Readings below 50 signal contraction.

It was the third contraction in four months, Reuters reported, raising questions about whether China’s export machine can keep making up for long-stagnant consumer spending.

Exports have been strong enough that China’s trade surplus with the world is on track to top last year’s $1.2 trillion.

But overseas Christmas orders that were rushed out in September cooled in October, and a burst of consumer spending during the weeklong National Day holiday fizzled afterward.

The production index fell 1.9 points to 49.8 and the new orders index fell 1.1 points to 49.4, according to the National Bureau of Statistics. New export orders also stayed in contraction.

Smaller companies took the hardest hit. Large manufacturers held in expansion at 50.2, while the gauges for medium and small firms dropped to 48.4 and 47.5.

The weakness spread beyond factories. The non-manufacturing index, which covers services and construction, slipped to 49.7 from 50.2, as construction activity fell 2.3 points to 48.0.

The services gauge eased to 50.0, the dividing line between growth and contraction, and the composite output index fell 1.0 point to 49.7.

“Insufficient demand is increasing downward pressure on the economy,” said Zhang Liqun, an analyst with the China Federation of Logistics and Purchasing.

Calls for More Stimulus

Economists urged Beijing to do more. Zhang Zhiwei, chief economist at Pinpoint Asset Management, said that if external demand weakens next year, “China will need more significant policy support to boost domestic demand.”

Lu Zhe, chief economist at Soochow Securities, called for expanding subsidies for mortgage interest payments “to shore up household confidence and anchor sentiment.”

Lu also said extending interest subsidies to investment projects would help ease a shortage of viable fixed-asset investments.

Not every sector struggled. Production and new orders gauges for railway equipment, shipbuilding, aerospace equipment and computer and electronics manufacturing were all at or above 53.0.

Companies tied to artificial intelligence have been posting strong results. Zhongji Innolight, which makes high-speed optical modules for AI data centers, nearly tripled its third-quarter net profit.

Older industries are faring worse. Weak domestic demand and rising costs have hit traditional manufacturers and property-linked firms, and custom furniture maker Oppein Home saw quarterly net profit plunge 80%.

The first month of a quarter is typically the weakest for the survey. China is still expected to meet its 4.5% to 5% growth target without new stimulus after third-quarter growth rose to 4.5% from 4.3%.

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