September 3, 2012 / 1:28 AM / 8 years ago

China factory surveys signal economic growth easing into Q3

BEIJING (Reuters) - China’s vast manufacturing sector has been badly hit by slowing new orders, two complementary surveys showed, a sign that the pace of growth in the world’s second-largest economy will weaken well into the third quarter and possibly beyond.

A labourer works at a textile mill in Huaibei, Anhui province, in this August 1, 2012 file picture. China's vast manufacturing sector has been badly hit by slowing new orders, a weekend survey showed, a sign that the pace of growth in the world's second-largest economy will weaken well into the third quarter. China's official factory purchasing managers' index (PMI) -- one of the early indicators of the state of the economy -- fell to a lower-than-expected 49.2 in August, the National Bureau of Statistics said September 2, 2012. REUTERS/Stringer/Files

The final reading of the HSBC China manufacturing purchasing managers’ index (PMI) for August fell to a seasonally adjusted 47.6, its lowest level since March 2009, down from 49.3 in July and slightly below a flash reading of the index late last month.

It followed China’s official factory purchasing managers’ index (PMI) - one of the early indicators of the state of the economy - which fell to a lower-than-expected 49.2 in August, the National Bureau of Statistics said on Saturday.

It was the first time since November 2011 that the official PMI had fallen below 50, which separates expansion from contraction. Economists polled by Reuters last week had expected it to slip to 50 from 50.1 in July.

The HSBC PMI though has been below 50 for 10 straight months.

“Beijing must step up policy easing to stabilize growth and foster job market conditions,” Qu Hongbin, chief China economist at HSBC said in a statement accompanying the survey.

Chief among manufacturers’ concerns is softness in new orders as demand falters, particularly from the euro zone.

The HSBC new orders sub-index fell to its lowest point since March 2009, helping drag output back into contraction after a more hopeful July. The HSBC output sub-index is at its lowest level since March.

“This, combined with a record high in stocks of finished goods sub-index, and a 41-month low employment index, suggests China’s exporters are facing increasing difficulties amid stronger global headwinds,” Qu said.

The official survey also showed new orders falling as the sub-index dropped for the fourth month in a row to 48.7, while export orders stabilized at 46.6. The output sub-index eased to 50.9 in August from July’s 51.8, the statistics bureau said.

Expectations for when growth would pick up following six consecutive quarters of slowing down have been steadily pushed back through 2012.

Weaker-than-expected data in July and now the PMIs have cooled market expectations again.

Barclays said on Monday there was downside risk to its full-year growth forecast of 7.9 percent. Mizuho Securities’ cut its expectations for China’s third-quarter growth on Friday to 7.4 percent and said it could slip further in the fourth-quarter to 7.2 percent.

Li-Gang Liu and Zhou Hao of ANZ Bank said they expected growth to be slower in the third quarter than in the second, predicting full-year expansion of 7.8 percent.

“We believe that China’s two interest rate cuts and liquidity injections into the market via large-scale reverse repos have not had substantial effect as many data show China’s economic growth momentum is clearly decelerating,” they wrote in a note.

Illustrating how much expectations have been lowered, the consensus forecast for third-quarter growth in a Reuters poll in mid-July was 7.9 percent.

“We still cannot see any signs that growth is bottoming out,” said Wang Jun, an economist at the government think-tank China Centre for International Economic Exchanges (CCIEE).

“I’m afraid the third-quarter growth could be lower than Q2. It’s possible that the Q3 growth rate may fall below 7.5 percent.”

Beijing is moving cautiously in trying to support the economy in what it calls a “prudent” policy stance for fear of re-igniting property and inflation risks.

China cut interest rates in June and July and has been injecting cash into money markets to ease credit conditions.

Although analysts expect Beijing to provide fresh policy support, some are starting to doubt that any measures will be dramatic.

“We think there are four things going on here. First, the government has underestimated the pace of the slowdown and is behind the curve. Second, there is an element of caution still at higher levels, with a quite reasonable fear over reliving the excesses of 2009-10,” wrote Xianfeng Ren and Alistair Thornton of IHS Global in Beijing, referring to the legacy of debt after China’s massive stimulus during the global financial crisis.

In addition, policy tools are losing effectiveness as capital flows out of China and the demand for loans remains weak, they wrote.

“Lastly, as if it had escaped anyone’s attention, there is a once-a-decade wholesale leadership swap happening in the next couple of months - minds are not solely focused on the economy,” they added.

A separate government PMI of the services sector painted a different picture, pointing to a pick up in activity as firms were able to pass through higher input prices. The PMI rose to 56.3 from 55.6 in July.

Still, the new orders sub-index dropped to 52.7 from 53.2 in July.


Thus far, and in contrast to heavy job cuts during the 2008 global economic crisis, employment has held up reasonably well, assuaging fears of social unrest in a politically sensitive year when the Communist Party conducts a once-in-a-decade leadership transition.

Relatively buoyant employment also gives policymakers some confidence that more aggressive stimulus measures are not needed.

“The economy is performing at below an 8 percent rate of growth this year — the number that for nearly a decade the government had assumed it needed to secure in order to generate sufficient job creation to ensure social stability,” wrote Nick Consonery, of political risk consultancy Eurasia Group.

“Yet all available evidence suggests that the country has only a limited unemployment problem,” he wrote last week.

But policy could change if employment begins to show signs of consistent strain. The employment sub-index of the official PMI showed a third month of contraction in August, slipping to 49.1.

The employment sub-index for the HSBC survey — whose private-sector respondents are more likely to react quickly in hiring and firing — reached 47.6, its lowest point since March 2009 and its sixth month below 50.

The official PMI generally paints a rosier picture of the factory sector than the HSBC PMI. The official survey focuses on big, state-owned firms, while the HSBC PMI targets smaller, private firms that have more limited access to bank loans.

The two surveys also differ in their seasonal adjustment.

Additional reporting by Kevin Yao; Editing by Raju Gopalakrishnan and Neil Fullick

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