Employees work at a shoe factory in Lishui, Zhejiang province. China’s giant manufacturing sector cooled more than expected last month. Photo: Reuters
INTERNATIONAL - China's manufacturing sector cooled more than expected last month in the face of tighter pollution rules that are forcing many steel mills, smelters and factories to curtail production over the winter.

The monthly official factory survey also showed unexpected weakness in new export orders, which had been expected to pick up heading into the peak year-end shopping season.

The data provides global investors with their first look at business conditions in China at the start of the fourth quarter, with the government’s punishing war on smog adding to uncertainty amid early signs of a slowdown in the world’s second-largest economy.

“Some regions stepped up pollution controls this month, with firms adjusting, halting or staggering production,” National Statistics Bureau official Zhao Qinghe said.

Zhao said that activity in energy-intensive and polluting industries slowed last month, while high-end manufacturing and consumption-related manufacturing continued to grow.

The official Purchasing Managers’ Index (PMI) released yesterday fell to 51.6points last month from 52.4points in September, which was the strongest in more than five years. It was the weakest reading in three months, but remained above the 50-point mark that separates growth from contraction on a monthly basis.

China’s economy has recorded better-than-expected growth of nearly 6.9percent in the first nine months of this year, buoyed largely by a recovery in its manufacturing and industrial sectors thanks to strong government infrastructure spending, a resilient property market and unexpected strength in exports.

Profits for the country’s industrial powerhouses surged 27.7percent in September, the most in nearly six years, as environmental inspections and the start of plant closures in smog-blighted northern provinces sparked fears of supply shortages and sent prices of finished goods, such as steel and copper, sharply higher.

However, the latest survey showed that input price gains slowed considerably last month, at 63.4points compared with 68.4points in September, the weakest since July.

A separate PMI for the steel industry showed that raw material purchase prices fell sharply last month after strong gains recently.

Output price gains also slowed, reflecting concerns that higher commodity prices have not trickled down to higher prices and profit margins for downstream industries.

Prices of steel-making raw materials, such as iron ore and coking coal, have started to dive on fears that winter output curbs will lead to a supply glut, weighing on mining companies and global commodity prices.

More rigorous restrictions on steel output are expected this month as manufacturers in 28 cities in northern China have been asked to stagger production to reduce emissions.

The latest pollution closures come on top of government efforts to trim and upgrade China’s bloated industrial sector by shutting down outdated capacity, which has also helped to support producer prices.

The PMI decline was “likely due to disruptions to industrial activity in north-eastern China as a result of the ongoing environmental crackdown, as well as softer investment spending in response to slower credit growth and the unwinding of pre-party congress fiscal support,” said Capital Economics China economist Julian Evans-Pritchard. “We anticipate further weakness in the months ahead.”

A sub-reading for output fell to 53.4points last month from 54.7points the previous month, still solid but matching the slowest growth over the past seven months.

The official survey pointed to cooling demand at home and abroad. Export-order growth nearly stalled, and was the weakest since December, while imports also slowed.