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China February HSBC PMI at 7-month high but deflation risk persists

Monday, March 2, 2015 - 10:48

[BEIJING] Activity in China's factory sector edged up to a seven-month high in February but export orders shrank and deflationary pressures persisted, a private business survey showed on Monday, underlying economic fragility that may need more policy support.

China's central bank cut interest rates on Saturday, just days before the annual meeting of the country's parliament, in the latest effort to support the world's second-largest economy as its momentum slows.

The final HSBC/Markit Purchasing Managers' Index (PMI) climbed to 50.7 in February - the strongest level since July - from 49.7 in January, as overall new orders picked up.

The number was stronger than a preliminary reading of 50.1, which was just above the 50-point level that separates growth in activity from a contraction on a monthly basis.

But even as factory activity picked up slightly last month, the survey showed manufacturers struggled to cope with erratic exports and deflationary pressures.

The new export orders sub-index dipped to 48.5 in February, the sharpest contraction in a year, while both input and output prices fell for a seventh month.

Manufacturing employment contracted for a 16th month, although the pace of job shedding moderated in February."China's manufacturing sector saw an improvement in overall operating conditions in February, with companies registering the strongest expansion of output since last summer while total new business also rose at a faster rate," said Annabel Fiddes, an economist at Markit. "However, the renewed fall in new export orders suggests that foreign demand has weakened, while manufacturers continued to cut their staff numbers (albeit fractionally)." An official survey released on Sunday showed China's factory sector contracted for a second straight month in February on unsteady exports and slowing investment, reinforcing bets that more policy loosening is needed.

Weighed down by a cooling property market, industrial overcapacity and slowing investment, China's economy grew 7.4 per cent in 2014, its slowest expansion in 24 years.

Chinese authorities will lean on interest rate and reserve requirement cuts and tolerate some currency weakness to ensure the economy grows around 7 per cent this year, as they try to head off deflation and keep employment strong enough to push on with reforms, policy insiders have said.

China's yuan fell to its weakest level since October 2012 against the dollar in early trade on Monday after the weekend rate cut.

In November last year, the PBOC unexpectedly cut interest rates - for the first time since 2012 - and then followed up with a cut to banks' required reserve ratio in early February.

Despite the raft of stimulus moves, a newspaper owned by the central bank warned on Wednesday that China is dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy that is not gaining speed.

China's annual consumer inflation hit a five-year low in January while factory deflation worsened, underscoring deepening weakness in the economy. Export and import growth had also tanked in the same month, performing worse than expected.

REUTERS