January 2, 2009 / 5:55 AM / 10 years ago

China factories cut output at record pace: CLSA PMI

BEIJING (Reuters) - Chinese factories slashed output and workers at a record pace in December and manufacturing activity overall fell for a fifth month as the global financial crisis hit export demand, a survey by brokerage CLSA showed on Friday.

A man walks on railway tracks in front of newly built apartment buildings in Baishan, Jilin province, December 3, 2008. REUTERS/Reinhard Krause

The figures, which CLSA said showed a sector close to recession, spell further gloom ahead for the Chinese economy and highlight the urgency with which the government is trying to cushion the country from the effects of the global crisis.

“Chinese manufacturing activity was very weak in December. Output contracted at a record pace, employment fell for the fifth month and work in hand declined,” Eric Fishwick, head of economic research at CLSA, said in a statement.

“With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession,” he said.

CLSA’s Purchasing Managers’ Index (PMI) rose to 41.2, up from the record low of 40.9 in November, indicating that while manufacturing was still shrinking, the pace had slowed from November’s record.

The output sub-index fell to 38.6, signaling the sharpest contraction in production since the survey was launched in April 2004. PMIs for Russia, the Netherlands and India also posted record lows for output.

Readings above 50 indicate improving conditions for manufacturers, while those below 50 indicate a deterioration in business conditions.

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The weak reading reflects other data suggesting further gloom for the Chinese economy, and particularly manufacturers, who have been hit unexpectedly hard as a result of the global financial crisis.

Official statistics showed that factory output grew just 5.4 percent in the year to November, the slowest pace on record, as overseas demand shrank and firms used up existing stocks of goods to cut costs. Exports fell from a year earlier that month, the first such drop in many years.

Looking to head off any marked increase in unemployment, authorities have taken a series of steps to counter the slowdown, including launching a 4 trillion yuan ($586 billion) stimulus package in November and repeatedly cutting interest rates.

While the government is aiming to maintain growth at 8 percent in 2009 — down from the 9.9 percent annual pace in the first nine months of 2008 — many economists say growth could be well below that in the first half of this year.

The PMI suggested tough times ahead for manufacturers, which could demand a stronger policy response from Beijing.

New orders continued to shrink in December, at the second-fastest pace on record and marking the fifth straight month of contraction. New export orders also declined at the second-sharpest pace in the history of the survey.

Firms’ backlogs of work fell at the sharpest pace on record, and they accordingly cut their work forces by the biggest margin ever, boding ill for the government’s efforts to preserve as many jobs as possible to help maintain social stability.

Slideshow (3 Images)

Output and input prices continued to fall sharply in December, though at a slower pace in November.

The CLSA PMI, compiled by research firm Markit Economics, is designed to give a timely snapshot of business conditions in the manufacturing sector.

The government’s official December PMI is due to be released on January 4. It hit a record low of 38.8 in November.

Reporting by Jason Subler; Editing by Neil Fullick

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