China's factory activity at 3-year low

A garment factory in China. The country's purchasing managers' index fell to a three-year low of 49.4 last month, the National Bureau of Statistics said yesterday. It is the weakest index reading since August 2012. Numbers below 50 indicate contracti
A garment factory in China. The country's purchasing managers' index fell to a three-year low of 49.4 last month, the National Bureau of Statistics said yesterday. It is the weakest index reading since August 2012. Numbers below 50 indicate contraction. PHOTO: EUROPEAN PRESSPHOTO AGENCY

PMI falls for sixth straight month, worsening dilemma for policymakers as growth slows

BEIJING • China's official factory gauge signalled a record sixth straight month of deterioration, raising the stakes for policymakers struggling to prop up the economy amid a second bear market in stocks since June and a currency at a five-year low.

The purchasing managers' index (PMI) dropped to a three-year low of 49.4 last month, the National Bureau of Statistics (NBS) said yesterday. It is the weakest index reading since August 2012. Numbers below 50 indicate contraction.

The Markit/Caixin factory PMI released yesterday also showed activity deteriorating, although at a slower pace than in December. The index was 48.4 and above the December figure of 48.2.

The Markit report focuses more on small- and medium-sized firms as opposed to larger state-owned firms in the official survey.

The official services index also fell last month - to 53.5, from a 16-month high of 54.4 in December.

The reports could worsen the dilemma for policymakers: Should they add monetary stimulus to help stem the slowdown in growth, or avoid more easing that could exacerbate record capital outflows and put more pressure on the yuan.

CLOSE MONITORING NEEDED

The pressure on economic growth remains intense in the light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing.''

HE FAN, chief economist at Caixin Insight Group.

"To maintain growth above 6.5 per cent this year the economy will need more policy support," said Greater China economic research head Ding Shuang at Standard Chartered Bank in Hong Kong.

Chinese stocks fell yesterday, extending January's steepest monthly rout since 2008, threatening to further shake investor faith in how top officials can manage the world's second-largest economy.

Mr Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong, said he expects more "quasi-fiscal policies" such as expedited spending on infrastructure to be announced in coming months.

The People's Bank of China cut the main interest rate six times from late 2014 to late last year to a record-low 4.35 per cent. It also has made a series of reductions to the reserve requirement ratio for big banks, allowing them to keep less cash locked up at the central bank.

Meanwhile, the US Federal Reserve in December raised rates for the first time in nine years.

China's capital outflows jumped in December, with the estimated 2015 total reaching US$1 trillion (S$1.42 trillion), a Bloomberg gauge shows, amid a 6.9 per cent economic expansion last year that was the slowest in a quarter century. 

The Shanghai Composite Index fell 1.8 per cent to 2,688.87 in morning trading yesterday, bringing this year's drop to 24 per cent. Hong Kong's Hang Seng Index lost 0.9 per cent.

The official manufacturing gauge's below-50 reading for the sixth month is the longest stretch it has been below that level in NBS data since the start of 2005. The PMI slumped last month because of weak demand and efforts to reduce overcapacity, NBS said.

Indicators for new export orders and imports also fell.

"The economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results," said chief economist He Fan at Caixin Insight Group.

"The pressure on economic growth remains intense in light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing."

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on February 02, 2016, with the headline 'China's factory activity at 3-year low'. Print Edition | Subscribe