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China's official factory PMI misses forecasts

An indicator of Chinese factory activity showed an unexpected contraction in October, denting hopes that the world's second-largest economy will post a fourth-quarter turnaround.

China's official manufacturing purchasing managers index remained unchanged at 49.8 in October from a month ago, the China Federation of Logistics and Purchasing, which issues the data with the National Bureau of Statistics, said on Sunday. This is its third consecutive month below the 50 mark, amid signs that government spending has yet to make significant traction in the world's second-largest economy.

The October PMI missed the median 50.0 forecast in a Wall Street Journal poll of 11 economists. A PMI reading above 50 indicates an expansion in manufacturing, while a reading below that points to a contraction.

"The good news is that things have stabilized a bit," said Commerzbank AG economist Zhou Hao. "But the bad news is that there's been no pickup."

China saw economic growth slow to 6.9% in the third quarter from 7% in the first half despite easier fiscal and monetary policy as Beijing tries to reach its target of about 7% growth for the year, which would be its slowest pace in a quarter century.

Chinese factories continue to pump out too much steel, glass, cement and other items even as they battle mounting debt, slumping prices and weak demand. Factories in the world's largest manufacturing nation have suffered 43 consecutive months of deflation. And loan demand among manufacturers in the third quarter turned negative for the first time since a central bank index started in 2004.

Zhao Qinghe, an economist with the statistics agency, said small companies continue to face ongoing funding problems even though China's central bank has cut its benchmark interest rate six times over the past year. "The manufacturing sector's imports and exports will continue to face challenges," he said in a statement.

China will pursue medium to high economic growth aimed at doubling the economy and per-capita income by 2020, over 2010 levels, leaders at the conclusion of a key Communist Party meeting said in a statement Thursday. But economists caution that reaching for this target could spur Beijing to pump up growth artificially, leading to less structural reform, more debt and greater industrial overcapacity.

Steve Chen, sales manager with Fujian Furniture Industry and Trading Corp. in eastern Fujian province, which exports to North America, Europe and Australia, said low-end furniture continues to sell well in U.S. chain and do-it-yourself stores, while sales of more expensive furniture have been hit hard by the weaker global economy. "Europe in particular is not doing so well right now," he added.

Improved loan demand in China in September and a jump in the number of investment projects had spurred hope that the economy was bottoming out, but the latest data is likely to disappoint investors when markets open this week, said Oliver Barron, China research head with investment bank North Square Blue Oak. "This data muddies the outlook," he said. "This suggests October data is not going to be as good as we thought."

The subindex measuring new orders climbed slightly while those measuring production and new export orders fell, the federation said.

China's official nonmanufacturing purchasing managers index, which includes services and related sectors, declined to 53.1 in October from 53.4 in September, the federation reported. That was its slowest pace since the financial crisis.

At a recent speech at the Central Party School, which trains Communist Party officials, Premier Li Keqiang said the economic challenges ahead should not be underestimated, but added that growth over the past year wasn't bad given the global slowdown. "We have never said that we should defend to the death any goal, but that the economy should operate within a reasonable range," Mr. Li said, according to a paraphrasing of his comments on a central government website.

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