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China PMI shows factory activity shrank again in February

SHANGHAI, March 1 (Reuters) - Hours after China's central bank cut interest rates to battle slowing growth and rising deflationary risk, an official survey showed on Sunday that activity in China's factory sector contracted for a second straight month in February.

The official Purchasing Managers' Index (PMI) inched up to 49.9 in February from January's 49.8, a whisker below the 50-point level separating growth from contraction on a monthly basis, but nevertheless above more pessimistic analyst forecasts for a 49.7 reading.

The new reading ended a four-month streak of declining numbers, and the National Bureau of Statistics (NBS) said the rise should be viewed more positively as it occurred despite the week-long Lunar New Year holiday, during which PMI usually contracts. This year, the holiday was in February. "In the context of stabilising macroeconomic policies including recent tax cuts and increased infrastructure spending, market demand rose and business confidence strengthened," the NBS said, adding that stabilising crude oil and raw material prices were also important factors.

The services PMI showed growth in that sector picked back up to 53.9, up from 53.7 in January, which the NBS attributed in part to strong holiday spending.

Accounting for 48 per cent of China's US$10.2 trillion economy last year, the services sector has weathered the growth downturn better than factories have, partly because it depends less on foreign demand.

From the breakdown of factory data, economic performance is uncertain. Employment, in negative territory for the last 12 months, contracted further to 47.8, its weakest reading since February 2013.

Output, while remaining positive, declined from 51.7 to 51.4. New orders rose slightly to 50.4, but export orders and imports both remained below 50, although the rate of contraction decreased.

The production and business outlook, however, rebounded sharply to again show growth, at 54, compared to the previous month's 47.4.

But the overall PMI figure remained below 50 and that, in combination with earlier negative surprises from trade and inflation data, appears to have sparked the central bank to act more quickly than some analysts anticipated.

Late on Saturday, the People's Bank of China (PBOC) cut interest rates, its second easing move in four weeks, as regulators show signs of intensifying concern that the drumbeat of lacklustre data since the fourth quarter is hurting investment and consumption.

The PBOC had already cut interest rates in November and reduced the reserve requirement - the ratio of cash that banks must set aside as reserves - earlier in February, the first such reduction in over two years.

A newspaper owned by the central bank warned on Wednesday that China was dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy not gaining speed.

The final February reading for the HSBC manufacturing PMI survey will be announced on Monday. The flash estimate showed factory growth edged up to a four-month high in February, but export orders shrank at their fastest rate in 20 months.

A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure China's economy dragged growth to 7.4 percent last year - a level not seen since 1990.

Reflecting China's "new normal" of slower but better-quality growth, economists at state think-tanks said the government is likely to lower its 2015 economic growth target to around 7 percent, from last year's 7.5 percent.

Sunday's PMIs are the last official Chinese data before this week's opening of the annual session of China's legislature, where leaders will announce a 2015 growth target. REUTERS