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 Analysts had already expected full-year growth to miss the goal of
around 7.5 percent, but many thought there may be some signs of
stabilization in the world's second-largest economy late in the year
after a flurry of stimulus measures.
Instead, the surveys showed demand at home and abroad continued to
cool and the labor market remained under stress, while adding to
fears that many companies are being starved of credit as banks grow
more reluctant to lend.
And measures announced in late September to shore up the slumping
housing market so far seem to be having little effect, reinforcing
expectations that Beijing will have to stump up more support.
"Growth momentum is slowing going into the fourth quarter," said
Kevin Lai, senior economist at Daiwa Capital Markets in Hong Kong.
"Exports were quite strong the last couple of months but that was
mostly driven by electronics demand. So the orders for iPhones etc.
have cooled down again. Europe and Japan are still struggling, so
that is not good news."
Growth in China's services sector slipped to a nine-month low of
53.8 in October, the weakest reading since January, from September's
54.0, the National Bureau of Statistics said.
It was still comfortably above the 50-point mark that separates
growth from contraction, but readings on areas such as real estate
and employment continued to shrink.
Home prices in China dropped for a sixth consecutive month in
October, a separate private survey showed on Friday, pointing to a
persistent downturn, despite government efforts to lift the market.
Beijing is counting on strong job growth in the services sector to
offset that weakness, and top policymakers have insisted that the
labor market remains resilient.
FACTORY GROWTH ALSO FRAGILE
Another official survey on Saturday showed factory activity
unexpectedly fell to a five-month low in October as firms fought
slowing orders and rising borrowing costs.
A private factory survey by HSBC/Markit on Monday showed a similar
worrying trend. Though overall growth picked up slightly, growth in
new orders and new export orders - proxies for domestic and foreign
demand - fell to their lowest in four to five months.
Exports have been one of the lone bright spots for the economy, and
helped offset weaker internal demand in the third quarter.
Tommy Xie, an economist at OCBC Bank, estimated that without firmer
exports, the economy would only grow an annual 6.7 percent in the
first three quarters this year - the slowest since the 1998 Asian
crisis.
The official PMI is focused on larger, state-owned factories, as
opposed to the HSBC/Markit PMI which focuses more on smaller
manufacturers in the private sector.
MORE SUPPORT MEASURES
Most analysts believe authorities will announce further modest
support measures in coming months to support growth, but they are
divided over whether policymakers will act more aggressively, such
as by cutting interest rates, unless there is a risk of a sharper
slowdown.
Barclays expects a bolder policy response soon.
"We maintain our forecast for two, 25-basis-point cuts in benchmark
interest rates, one in Q4 14 and one in Q1 15," the bank's
economists said in a research note.
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"Weakening October official PMI, soft domestic demand and rising
disinflationary risks are adding to the probability of more monetary
easing. We also note that the PMI shows that the targeted easing
measures are not effective in supporting small- to medium-size
enterprises."
China's annual economic growth slowed to 7.3 percent in the third
quarter, the weakest pace since the global financial crisis, even as
the government rolled out more stimulus measures.
A Reuters poll published last month forecast the economy could grow
at an annual 7.3 percent in the fourth quarter, leaving the
full-year pace at 7.4 percent - the weakest in 24 years.
But Daiwa's Lai was more bearish, expecting fourth-quarter growth to
slow to 6.9 percent, dragging full-year growth to 7.2 percent.
FUNDING COSTS RISING
The government has vowed to maintain policy measures which are
targeted at the most vulnerable sectors of the economy.
So far this year, it has accelerated construction of railway and
public housing projects, cut reserve requirements (RRR) for some
banks and, perhaps most significantly, loosened lending rules to
support the housing market.
As would be expected, the official factor survey on Saturday 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.
But Chinese companies in general are facing higher borrowing costs
as banks grow more cautious about the cooling economy.
Funding costs rose 13.5 percent in the first nine months of this
year compared with a year ago, the government survey showed, adding
to the burden on factories which are already battling shrinking
profit margins.
China's biggest banks last week reported rising bad loans for the
third quarter, and one said the credit crunch which is squeezing
small companies in the country's export-oriented eastern provinces
may be spreading westwards.
"The possibility that risks will gradually spread from small
enterprises to large and medium enterprises ... and from eastern
region and coastal areas of China to central and western regions
will be intensified," the country's fifth-largest listed lender Bank
of Communications Co Ltd said.
(Additioanl reporting by Koh Gui Qing and Jake Spring; Editing by
Kim Coghill)
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