Shrinking Factory Activity Highlights Growing Pressure on China’s Economy
* The official reading of a key gauge of factory activity fell in February to its lowest point in three years
* The reading suggests that economic pressure on China’s manufacturers has not let up, an analyst said, predicting that conditions would deteriorate further in the short term
(Beijing) — China’s manufacturing sector shrank at the fastest pace in three years in February, underscoring increasing pressures on the world’s second largest economy in the face of a global slowdown and a damaging trade war with the United States.
The official reading of China’s official manufacturing purchasing managers index (PMI), a key gauge of factory activity, fell to 49.2 in February, the lowest since February 2016, according to the National Bureau of Statistics (NBS) on Thursday. The reading remained below the 50-point mark — which separates expansion from contraction — for the third straight month and missed analysts’ forecasts.
Surveys by Bloomberg and Reuters had both forecast that February’s PMI would stay at 49.5, unchanged from January.
“The official PMIs suggest that growth remains under pressure and we expect conditions to weaken further in the coming months,” said Julian Evans-Pritchard, senior China economist at Capital Economics Ltd. Manufacturing accounts for about 30% of China’s gross domestic product (GDP).
“While there are tentative signs that credit growth is now starting to bottom out, we don’t think that will put a floor beneath growth until the middle of this year at the earliest,” Evans-Pritchard wrote in a research note.
The lower reading of February is partly due to the production suspension for the weeklong Lunar New Year holiday, which fell in early February this year, said Zhao Qinghe, a senior statistician at the NBS.
However, the combined reading of January and February — which averaged at 49.25 this year — also suggested a further slowdown in manufacturing compared with the 49.4 reading in December, according to Nomura Securities Co. Ltd.
China’s nonmanufacturing business activity index, which includes the services and construction sectors, also slowed, but remained in expansion territory, NBS data showed. The official nonmanufacturing index fell to 54.3 in February from 54.7 the previous month.
Activity in the construction sector slowed at faster pace in February, likely dragged down by the cooling property sector. The services sector, which accounts for more than half of China’s economy, eased slightly to 53.5 from 53.6 in January, but continued to expand at a rapid pace, which could offset some of the impact from the shrinking manufacturing sector.
The independently compiled Caixin China Manufacturing PMI is scheduled to be published on Friday.
The drop in the official manufacturing PMI was mainly driven by the production subindex, which slipped below 50 for the first time in 10 years, according to NBS data. A subindex tracking factories’ raw materials inventory also fell further to 46.3 from 48.1 in January.
A subindex measuring new export orders continued its decline to 45.2 in February from 46.9 the previous month. But reading of total new orders rebounded by 1 point to 50.6, indicating new domestic orders were increasing at a faster pace following Beijing’s policies to stimulate fiscal spending and expand the credit supply.
Another silver lining in February manufacturing readings was a rebound in subindexes tracking prices and business expectation, reflecting a revival in business confidence amid supportive government policies and positive signs of China-U.S. trade talks.
But China’s economic fundamentals have yet to shift into positive territory, Nomura said in its research note.
“The credit supply surges in January were encouraging but not enough to shore up an economic rebound,” the brokerage said, adding further to headwinds facing China’s economy such as the cooling property sector, the end of the durable goods replacement cycle and the payback effect from the previous front-loading of exports.
China’s stock markets have surged in recent weeks after slumping to a four-year low in 2018, thanks to relaxed liquidity conditions and government moves to encourage investment in stocks. But analysts have called for caution as they said the recent spike has been mainly driven by retail investors, while the cooling economy and pending capital market reforms are still posing uncertainties to the markets.
China’s central bank on Tuesday warned that the economy faces growing downward pressure and that it “remains an arduous task to prevent and defuse financial risks,” while outlining its policy priorities for the coming year.
Nomura said it expects China’s GDP growth to slow further in the first half and more aggressive policies to come.
Julia Wang, Greater China economist at HSBC, forecast that China’s policymakers will likely remain focused on supporting growth in the near term, with more details about tax cuts expected at the upcoming meeting of the national legislature starting next week.
HSBC expects policymakers to remain vigilant about risks to financial stability and to accelerate regulatory and market reforms over the next few months, Wang said.
Contact reporter Han Wei (email@example.com)
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