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 The official Purchasing Managers' Index (PMI) eased to 50.8 in
October from September's 51.1, the National Bureau of Statistics
said on Saturday, but above the 50-point level that separates growth
from contraction on a monthly basis.
Analysts polled by Reuters had forecast a reading of 51.2.
Underscoring the challenges facing the world's second-largest
economy, the PMI showed foreign and domestic demand slipped to five-
and six-month lows, respectively, with overseas orders shrinking
slightly on a monthly basis.
"There remains downward pressure on the economy, and monetary policy
will remain easy," economists at China International Capital Corp
said in a note to clients after the data.
Noting that inventory levels of unsold goods rose last month even as
factories cut output levels and drew down on stocks of raw
materials, the investment bank argued that the economy still faced
tepid demand.
It has been a tough year for China's economy. Growth fell to 7.3
percent in the third quarter, its lowest level since the 2008/09
global financial crisis, as the housing market sagged and domestic
demand and investment flagged.
 The cooldown, expected to be China's worst in 24 years this year
according to a Reuters poll, came despite a flurry of government
support measures.
Saturday's PMI suggested no imminent recovery in demand.
An index for new orders - a proxy for foreign and domestic demand -
retreated to 51.6 in October from September's 52.2. New export
orders edged down to 49.9 in October, pointing to a contraction,
from 50.2 in September.
BETTER OFF BIG
The PMI followed warnings from China's industrial ministry on Friday
that factories were under pressure from high borrowing costs, which
were further exacerbating the sector's slowdown.
Like other economies around the world, smaller-sized companies in
China are often ignored by banks when they need financing, forcing
them to turn to pricier alternatives for funds.
More costly funding, up 13.5 percent in the first nine months of
this year compared with a year ago, according to the government,
adds to the burden of factories which are already battling shrinking
profit margins.
Still, the PMI showed big Chinese factories were weathering the
downturn better than their smaller counterparts, as banks prefer to
lend to larger state-owned firms, assuming the government will bail
them out to prevent any defaults.
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Large manufacturers grew last month with their PMI little changed at
51.9, data showed, while business shrank for small- to medium-sized
factories. The PMI for mid-sized factories fell to 49.1 in October
from September's 50, and the index for small manufacturers was
little changed at 48.5.
"There is a need to carry out more quickly the policy measures
related to 'stabilizing growth'", said Chen Zhongtao, an official at
the China Logistics Information Centre, which helps publishes the
PMI.
Chen was referring to recent government announcements aimed at
supporting the economy.
To encourage more growth, China has cut taxes, quickened some
investment projects, lent short-term loans to banks, instructed
local governments to spend their budgets and reduced the amount of
deposits that some banks hold as reserves to spur lending.
It said on Friday that it would invest at least 200 billion yuan
($32.7 billion) on three new railway lines to move goods and
passengers across the country.
But the raft of measures - which were issued over a space of a few
months - have failed to sustain momentum in the economy, prompting
authorities to take one of their most drastic policy actions this
year by cutting mortgage rates in September.
And even lower mortgage rates have not revived the housing market as
quickly as some had hoped.
Home prices in China dropped for a sixth consecutive month in
October, a private survey showed on Friday, a trend that should
continue to weigh on the Chinese economy, which derives about 15
percent of its growth from the real estate sector.
(Reporting by Koh Gui Qing; Editing by Kim Coghill)
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