China’s factory sector hits four-year low

A slew or reports released Tuesday showed China’s economy continues to slow.

China’s manufacturing sector posted its lowest reading in four years in February, shrinking faster than expected on a combination of overcapacity and weak demand.

Chinese textile factory

Chinese textile factory

The official Purchasing Managers’ Index (PMI) fell to 49.0 in February down from 49.4 in January’s, and below the 49.3 forecast by economists’ polled by Reuters. It was the lowest reading since November 2011. A reading below the 50-point mark signifies contraction.

“The PMI came in much weaker than markets expected, hinting that recent easing measures have had limited impact in turning around the weakening manufacturing sector,” wrote senior emerging markets economist Zhou Hao at Commerzbank in Singapore.

Released shortly after the official report, the private Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI), which focuses more on small to medium-sized, private firms, confirmed the diagnosis. The Caixin index fell to 48.0, the 12th straight month activity contracted. The number was short January’s reading of 48.4 and below the 48.3 expected by the market.

The decline in manufacturing activity caused smaller companies to shed workers at the fastest pace in seven years and led many to believe Beijing will have to ramp up stimulus to avoid a deeper economic slowdown, Reuters reported. Just yesterday, the People’s Bank of China cut the reserve ratio by 0.5 percentage point.

The Caixin report showed companies shed jobs at the fastest pace since January 2009. In addition to downsizing and cost cutting, companies said workers who were leaving voluntarily were not being replaced. The employment sub-component of the index fell to 46.0 from January’s 47.0.

The official PMI survey, which is focused more on larger, state firms, has shown persistent declines in employment for the last 3 1/2 years.

Meanwhile, the service sector, which Beijing has been counting on to drive the economy amidst the decline in manufacturing, also posted a weaker reading.

The official non-manufacturing PMI fell to 52.7 in February, down from 53.5 in January. While a reading above 50 signifies expansion, this was the weakest reading since late 2008.

The services sector has been taking up an increasing amount of economic slack as manufacturing cools, but analysts have wondered how long it can remain resilient in the face of the prolonged factory slump and increasing unemployment.



Categories: Asia Unhedged, China

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