China factories struggle, adds to expectations for stimulus

BEIJING Tue Apr 1, 2014 6:21am EDT

1 of 3. An employee works at a Chinese automobile factory in Hefei, Anhui province, in this file picture taken March 15, 2014.

Credit: Reuters/Stringer/Files

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BEIJING (Reuters) - Persistent weakness in China's manufacturing sector reinforced fears of a sharper-than-expected slowdown at the start of 2014, and some government economists think authorities have already started boosting spending to put a floor under growth.

On Tuesday two surveys showed that manufacturing struggled in March, with activity at smaller, private firms contracting for a third month, adding to a run of disappointing data that has sparked speculation of imminent government-led stimulus.

The official purchasing managing index (PMI) edged up to 50.3 in March from 50.2 in February, pointing to slight expansion, but some economists said even that suggested weakness given activity typically picks up more after the Lunar New Year holidays in February.

The Markit/HSBC Purchasing Managers' Index (PMI), which focuses more on the private sector, fell to an eight-month low of 48.0 in March. The index has been below the 50 level since January, indicating a contraction this year.

"We're still in a subdued part of the cycle," said Louis Kuijs, chief China economist at the Royal Bank of Scotland.

"I still don't think the downward pressures are tremendous, but they are large enough for the government to really start to talk about the need to support growth."

In March, sources told Reuters the central bank was prepared to loosen monetary policy in order to keep the world's second-biggest economy growing at the government's target rate of 7.5 percent.

STIMULUS BY ANOTHER NAME

Premier Li Keqiang said last week the necessary policies were in place and the government would push ahead with infrastructure investment, seen by analysts as a signal of official concern about a slowing economy.

Economists at top government think-tanks believe some of this spending is already under way, as Li had outlined "policy reserves" in a report to parliament last month.

"The top priority is stabilizing growth. Policy measures have been prepared and it's just a matter of implementation," said Wang Jun, senior economist at China Centre for International Economic Exchanges.

"The pace of investment and fiscal spending is quickening."

With the economy cooling, weaker and more indebted firms are beginning to feel the squeeze and a Chinese newspaper reported on Tuesday a second case of a domestic bond default in less than a month.

As long as the sums involved and affected companies are relatively small, authorities appear content to let cases like that serve as an incentive for banks and investors to better assess risks.

Beijing's concern is, however, that with a deeper prolonged slump, financial stress could spread undermining confidence in the entire financial system.

The stimulus is expected to be far more targeted and modest than the 4 trillion yuan package during the global crisis in 2008-09, to prevent problems of overcapacity and debt as well as maintaining the government's focus on structural reforms.

"They are doing it quietly. They cannot use the word stimulus, which has become a negative word," said Xu Gao, chief economist at Everbright Securities in Beijing.

Xu expects the government spending will see annual economic growth to rebound to 7.5 percent in the second quarter from his forecast of 7.3 percent in the first quarter.

The government wants to reduce the economy's dependence on exports and enhance the role of consumption, but it is unclear how much growth it might be willing to sacrifice.

"These measures will slow down China's growth in short term, but will make growth more sustainable in longer term," Asian Development Bank deputy chief economist Juzhong Zhuang said at the release of the ADB's 2014 outlook report on Tuesday.

In the report, the ADB lowered its forecast for China's growth this year to 7.5 percent from 7.7 percent earlier.

(Editing by John Mair)

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Comments (2)
aunticcp wrote:
Once more article concerning finance and never a word concerning human rights. I think that I know why the human rights issue is never mentioned when it comes to the CCP. It is because the Chinese Communist Party offers its people no human rights whatsoever. Because of corporate greed, people living in the west have been and are still being kept in the dark concerning the true nature of the brutal Chinese Communist Party and the atrocities that have been and are still being committed,such as the attempted genocide of the tens of millions of innocent Falun Gong practitioners who live in Red China. Atrocities such as illegally arresting a young, pregnant Falun Gong practitioner and having her raped by a gang of hardened criminals, just because of her belief in truthfulness and tolerance. Atrocities such as organs being removed from thousands of living Falun Gong without the use of any anesthetic. Atrocities such as hanging newborn babies by their ankles with piano wire, in front of their mothers, to try to force them to disavow their belief in God. Atrocities such as the murder of over one million Falun Gong since this persecution began in 1999. Thank you for your concern.

Mar 31, 2014 9:48pm EDT  --  Report as abuse
blurtman wrote:
HSBC is a criminal organization. Laundering money for the drug cartels, terrorists. If Madoff published an index, would it have any credibility? S&P, Moody’s both committed massive ratings fraud. Can you believe their ratings now? The whole system is corrupt but folks pretend otherwise. Amazing.

Mar 31, 2014 11:24pm EDT  --  Report as abuse
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