Tags: china | factory | pmi | growth

China Factory Data Signal Deepening Growth Problems

Sunday, 02 Sep 2012 02:42 PM

 

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China's vast manufacturing sector has been badly hit by slowing new orders, a weekend survey showed, a sign that the pace of growth in the world's second-largest economy will weaken well into the third quarter.

China's official factory purchasing managers' index (PMI) -- one of the early indicators of the state of the economy -- fell to a lower-than-expected 49.2 in August, the National Bureau of Statistics said on Saturday.

It was the first time since November 2011 that the number had fallen below 50, which separates expansion from contraction. Economists polled by Reuters last week had expected it to slip to 50 from 50.1 in July.

New orders fell for the fourth month in a row, to 48.7, while export orders stabilized at 46.6.

The government data is in line with a plunge in an advance, or flash, PMI published last month by HSBC. That index dropped to a nine-month low of 47.8 in August, as new export orders slumped and inventories rose. The final results of the HSBC survey, which better reflects smaller and privately-owned producers, will be released on Monday.

Together, the results could strengthen the case for further policy steps to bolster growth, but analysts are starting to doubt that dramatic action is forthcoming.

"We think there are four things going on here. First, the government has underestimated the pace of the slowdown and is behind the curve. Second, there is an element of caution still at higher levels, with a quite reasonable fear over reliving the excesses of 2009-10," wrote Xianfeng Ren and Alistair Thornton of IHS Global in Beijing, referring to the legacy of debt after China's massive stimulus during the global financial crisis.

In addition, policy tools are losing effectiveness as capital flows out of China and the demand for loans remains weak, they wrote.

"Lastly, as if it had escaped anyone's attention, there is a once-a-decade wholesale leadership swap happening in the next couple of months - minds are not solely focused on the economy," they added.

 

A raft of weaker-than-expected data in July had already cooled market expectations for any quick economic recovery in China. The central bank emphasises a "prudent" policy stance for fear of re-igniting property and inflation risks, but analysts believe it may still take incremental steps to loosen.

China cut interest rates in June and July and has been injecting cash into money markets to ease credit conditions to support the economy after it notched a sixth straight quarter of slower growth in the April-June period.

But, given the latest data, it seems doubtful whether that will be enough to stop the slowdown in the pace of growth from extending to a seventh quarter.

 

EMPLOYMENT SLIPS

Thus far, and in contrast to heavy job cuts during the 2008 global economic crisis, employment has held up reasonably well, assuaging fears of social unrest in a politically sensitive year and allowing planners to hold off on aggressive stimulus measures.

"The economy is performing at below an 8 percent rate of growth this year -- the number that for nearly a decade the government had assumed it needed to secure in order to generate sufficient job creation to ensure social stability," wrote Nick Consonery, of political risk consultancy Eurasia Group.

"Yet all available evidence suggests that the country has only a limited unemployment problem," he wrote last week, arguing that gives policymakers the confidence to stay the course.

But policy could change if employment begins to show signs of consistent strain. The employment sub-index of the official PMI showed a third month of contraction in August, slipping to 49.1.

The output sub-index eased to 50.9 in August from July's 51.8, the statistics bureau said.

While the official survey fell below 50 for the first time since November, the HSBC PMI has been below 50 for 10 straight months.

The official PMI generally paints a rosier picture of the factory sector than the HSBC PMI. The official survey focuses on big, state-owned firms, while the HSBC PMI targets smaller, private firms that have more limited access to bank loans.

The two surveys also differ in their seasonal adjustment.

Many analysts believe the central bank will continue to loosen policy further by cutting interest rates and banks' reserve requirement ratio in coming months to support growth.

According to the latest Reuters poll, China's annual economic growth could pick up to 7.9 percent in the third quarter from a three-year low of 7.6 percent in the second quarter in response to government policy fine-tuning.

But unabated gloomy data has already led some economists, like Li-Gang Liu and Zhou Hao of ANZ Bank, to instead forecast slower growth in the third quarter than the second.

"We believe that China's two interest rate cuts and liquidity injections into the market via large-scale reverse repos have not had substantial effect as many data show China's economic growth momentum is clearly decelerating," they wrote in a report on Saturday.

© 2014 Thomson/Reuters. All rights reserved.

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