China factory output falls for fifth month: HSBC PMI

BEIJING Sat Mar 31, 2012 10:41pm EDT

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BEIJING (Reuters) - China's factory slowdown worsened in March as output fell for a fifth consecutive month and manufacturers received fewer orders, a private survey showed, building the case for Beijing to take new policy steps to shore up economic growth.

HSBC said on Sunday its final Purchasing Managers' Index (PMI) fell to 48.3 in March from 49.6 in February, and largely in line with HSBC's Flash PMI reading of 48.1 for March.

The sub-index for manufacturing output slid to 47.3 in March from February's 50.2, the second-lowest reading since March 2009 after November's trough of 46.1.

"Final PMI results confirm a further slowdown of growth momentum, weighed by weakening new export orders," said Qu Hongbin, an economist at HSBC. "Weaker export growth is likely to prompt further easing measures."

Survey results showed both foreign and domestic demand were poor. Sub-indices for new orders and new export orders languished below the 50-point level that separates expansion from contraction in activity.

It was the fifth consecutive month that new orders shrank. New export orders rebounded from an eight-month low in February but still contracted in March.

Worryingly, the survey also showed factory inflation quickened to stay above 50 points despite slower production that shrank factory employment to a three-year low.

The gloomy PMI reading mirrors the decline in China's actual factory output, where growth slumped to a 2-1/2-year low of 11.4 percent in January and February.

Some economists have warned against reading too much into China's January and February economic data because they are distorted by the Lunar New Year holiday, but HSBC noted its average PMI readings in the first quarter were the worst in three years.

Even so, some analysts are hopeful China's economy will speed up after March if Beijing further loosens monetary policy and unveils more state spending.

Qu expects China to further reduce the amount of cash banks must hold as reserves before the end of June by cutting the reserve requirement ratio by 100 basis points.

Beijing could also lower taxes and raise fiscal spending to boost activity, he said.

Below are some notable findings from the PMI report compiled by Markit:

-- Factories said rising production costs were mainly driven by higher raw material prices and fuel costs.

-- But manufacturers said they have not passed on higher costs to their customers. Instead, they said they have resorted to cutting prices to attract or retain clients as their output prices stayed below 50 points for the fifth straight month.

-- Factories have shed jobs in three of the last four months with manufacturers citing slowing business, employee resignations and company restructuring as reasons.

-- Suppliers' delivery times lengthened in March due to transportation problems, supply bottlenecks and labor shortages.

For more news on China's economy, see CN-MCE-NEWS

(Reporting by Koh Gui Qing; Editing by Kim Coghill and Benjamin Kang Lim)

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