China: Manufacturing Contraction Continues

March 1st, 2015
in News, econ_news, syndication  The official PMI (Purchasing Managers' Index) from the Chinese government has reported another month below 50, the demarcation between expansion and contraction.  The index for February was 49.9, up slightly from the 49.8 reported in January.  This slight increase was the first time since July last year that the manufacturing PMI was higher than the month before.  See graph below.  The data was released just a few hours after the Peoples' Bank of China (PBoC) announced a 0.25% cut for a benchmark lending interest rate, as if in justification of that action.

Follow up:

The service sector in China continues to do well with the non-manufacturing PMI for February coming in at 53.9, up from 53.7 in January.

The following graph from Trading Economics shows the decline in manufacturing in China over the past half year.

Following are some comments on the latest data.

Liyan Qi and Mark Magnier, The Wall Street Journal:

February's below-50 level factory PMI reading comes as deflationary pressure and weak expansion in Europe and Japan leave global investors in search of growth. Chinese exports and imports weakened in January, inflation hit a five-year low and the real-estate market continues to swoon.

Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist was very emphatic about the need for PBoC action (Bloomberg):

"With the property markets deflating and the economy in desperate need of interest-rate relief because of the high stock of debt, the PBOC has been forced to take the recent actions.  China continues to decelerate."

Nomura analysts wrote in research note quoted by Reuters that the interest rate cut had come sooner than predicted:

"This rate cut signals policymakers' willingness to take further action to ease financing conditions in an effort to maintain stable growth.  It also suggests that growth may have slowed sharper than we expected."

ING economist Tim Condon (The Wall Street Journal) suggested a wait-and-see approach was in order as he expects more cuts in interest rates and loosening of reserve requirements for banks:

"The economy is limping along.   We'll see how fast it's able to grow without much exports."

The data for January and February tends to be volatile and subject to weakness due to the advent of the Chinese New Year at this time.  With the holiday coming after the middle of February this year, that month could be expected to be weaker than January and it was not.  That has led some analysts to give a positive interpretation.  Zhao Qinghe, a senior analyst at China's National Bureau of Statistics (Wall Street Journal):

"This reflects modest recovery in domestic demand."


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