China's PMI reports show slowdown deepening as services slip
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."