China's PMI re­ports show slow­down deep­en­ing as ser­vices slip

The Pak Banker - - MARKETS/SPORTS -

China's fac­tory gauge ex­tended its stretch of de­te­ri­o­rat­ing con­di­tions to a record seven months while a mea­sure of ser­vices fell to the weak­est in seven years, un­der­scor­ing the chal­lenge for pol­icy mak­ers as they seek to cut over­ca­pac­ity in man­u­fac­tur­ing with­out de­rail­ing growth.

The man­u­fac­tur­ing pur­chas­ing man­agers in­dex dropped to 49 in Fe­bru­ary, miss­ing the me­dian es­ti­mate of econ­o­mists. It hasn't been weaker since Jan­uary 2009. Num­bers below 50 in­di­cate con­di­tions wors­ened. In a sign China's slow­down is spread­ing, the non-man­u­fac­tur­ing PMI -which has been out­per­form­ing the fac­tory mea­sure -- fell to the low­est level since De­cem­ber 2008.

The cen­tral bank late Mon­day stepped up ef­forts to cush­ion de­mand amid plung­ing stock prices and a weak­en­ing cur­rency, free­ing up the amount of cash the na­tion's banks can lend. The Na­tional Peo­ple's Congress will gather Satur­day, where plans for 2016 and the next five years will be out- lined. "Pol­icy will con­tinue to be ex­pan­sion­ary and the fo­cus is mov­ing from cur­rency and sup­ply-side re­forms to de­mand­side stim­u­lus," said Larry Hu, head of China eco­nom­ics at Mac­quarie Se­cu­ri­ties Ltd. in Hong Kong. "Up­com­ing data will con­tinue to show a slow­down in the econ­omy." Sea­sonal ef­fects may have dis­torted the read­ings, as the week-long Lu­nar New Year hol­i­day fell in Fe­bru­ary.

"This falls into our ex­pec­ta­tion that the Chi­nese New Year hol­i­day had a neg­a­tive im­pact on man­u­fac­tur­ing as fac­to­ries closed," said Iris Pang, a se­nior econ­o­mist for Greater China at Natixis SA in Hong Kong. "On the other hand, the hol­i­day was pos­i­tive for the ser­vices sec­tor be­cause it boosted hol­i­day spend­ing and do­mes­tic tourism." Still, the ser­vices gauge slipped to 52.7 in Fe­bru­ary, from 53.5 in Jan­uary. Mea­sures of new or­ders, sell­ing prices, em­ploy­ment, back­logs and in­ven­to­ries were below the 50 di­vid­ing line be­tween im­prov­ing and wors­en­ing con­di­tions.

A sep­a­rate man­u­fac­tur­ing read­ing from Caixin Me­dia and Markit Eco­nom­ics fell to 48 in Fe­bru­ary, from 48.4 in Jan­uary.

"Early signs sug­gest stim­u­lus has yet to gain sig­nif­i­cant trac­tion, point­ing to the need for con­tin­ued and ex­panded pol­icy sup­port," Bloomberg News econ­o­mists Tom Or­lik and Field­ing Chen wrote in a note. "In the near term, that likely means the an­nounce­ment of a larger fis­cal deficit tar­get at the Na­tional Peo­ple's Congress on Satur­day, plus stealth moves to guide lend­ing rates lower." On the of­fi­cial man­u­fac­tur­ing mea­sure, the new or­ders, em­ploy­ment and pur­chas­ing quan­tity com­po­nents slipped. The read­ings dash hopes a lend­ing binge in Jan­uary would flow through to boost ac­tiv­ity.

The credit surge "is hav­ing an un­der­whelm­ing im­pact on the econ­omy," said Vic­tor Shih, a pro­fes­sor at the Univer­sity of Cal­i­for­nia at San Diego who stud­ies China's pol­i­tics and fi­nance. "The prob­lem may be that in­vest­ment is in­creas­ingly state driven, which only ben­e­fits a small hand­ful of state-owned en­ter­prises. The pri­vate sec­tor is still suf­fer­ing from de­fla­tion­ary pres­sure."

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