China Manufacturing Slows More Than Expected

Mar 01, 2016

 

Official and private indexes both show activity weakened sharply in February

Activity in China’s manufacturing sector weakened sharply last month, according to two indexes, as the world’s second-largest economy continues to struggle with overcapacity and anemic demand.

China’s official manufacturing purchasing managers index fell last month to its lowest level in more than four years, 49.0—down from 49.4 in January—government data released Tuesday showed. A separate private gauge, the Caixin China manufacturing PMI, dropped to 48 in February from 48.4 the month before, Caixin Media Co. and research firm Markit Ltd. said.

With February’s reading, the official PMI has remained below 50, the level dividing contraction from expansion, for seven straight months; for the Caixin index, it was the 12th consecutive month in contraction territory.

Seasonal factors contributed to the declines, with the weeklong Lunar New Year holiday. But the declines were greater than projected by economists, who said the weak readings likely played into the People’s Bank of China’s decision late Monday to free up more money for lending by reducing the amount of reserves banks are required to hold.

“This is a weak start to the year, which means that policy still needs to be more expansionary,” said Standard Chartered Ltd. economist Shuang Ding. “Overcapacity continues to slow down investment in manufacturing, and property investment is still weak.”

The Shanghai Composite Index put in a choppy performance during morning trading.

Mr. Ding predicted more cuts ahead in the reserve requirement, as well as a renewed focus on fiscal spending at the annual meeting of the National People’s Congress, China’s parliament, which starts Saturday.

The PMI readings reinforce other data that show a wobbly start to 2016 for Chinese economy, after growth sagged to 6.9%, its lowest level in a quarter century, last year.

A subindex of the official PMI measuring production also fell, while the new-order subindex declined to its lowest level since the global financial crisis. The official PMI for nonmanufacturing activity, released Tuesday, also fell, to 52.7 from 53.5 in January.

Analysts said while the holiday affected the February readings, a larger factor was the continuing economic drag from too many empty houses and too many factories pumping out unwanted goods. The weak readings dovetail with those from major trading partners, including Japan and the U.S., as sluggish global demand weighs on factory output and low energy prices add to deflationary pressures, making it harder for businesses to pay debts, economists said.

Rong Zhaoxia, a saleswoman with Bonanza Metalware Ltd., a Guangdong province maker of stainless-steel kitchenware for export to Australia and Europe, said orders have fallen for the past two years. The company lost nearly two weeks of production to the Lunar New Year holiday, she said, adding that Bonanza is keeping inventory to a minimum and using fewer raw materials as sales slow.

“I think sales will slow further this year, just like in 2015,” Ms. Rong said. “Our longtime clients will continue to place orders. But the question is how many.”

Signs of near-term relief for the economy are few, economists said. Weak power-generation and steel-output figures in February point to economic growth below 6% for the first two months of the year, said Commerzbank AG economist Zhou Hao in a research note. Meanwhile, sharp property-price increases in Shenzhen, Shanghai and other major cities suggest that money is going into speculative purchases rather than the real economy, he added.

“The lack of signs of strengthening growth momentum in 2016 is worrisome,” said Société Générale in a research note.

Senior officials and Chinese leaders have been trying to talk up the state of the economy over the past two weeks, most recently at a meeting of finance ministers and central bankers from the world’s 20 major economies over the weekend. Premier Li Keqiang told the Group of 20 officials that China has “potential, resilience and flexibility” to meet economic challenges.

 

Source: wsj.com