BEIJING (Reuters) - China's factory activity unexpectedly fell to a five-month low in October as firms fought slowing orders and rising costs in the cooling economy, reinforcing views that the country's growth outlook is hazy at best.
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.
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.
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