China's Jan manufacturing PMI falters; analysts expect loosening of monetary policy

Beijing

CHINA'S official manufacturing purchasing managers' index (PMI) unexpectedly fell in January to its lowest level in more than two years, official statistics showed last week. This will increase pressure on the central bank to further loosen monetary policy, analysts say.

The index fell to 49.8 last month compared with 50.1 in December, the National Bureau of Statistics (NBS) said, missing analysts' expectations.

A panel of nine economists interviewed by Dow Jones had anticipated a reading of 50.3. A reading below 50 indicates contraction while anything above 50 shows expansion.

The reading comes as China braces itself for its worst economic slowdown in a quarter century. The economy grew 7.4 per cent last year and 7.3 per cent during the last quarter.

Analysts expect growth to fall below 7 per cent this year as the world's second-largest economy struggles with ongoing deep-rooted structural challenges, including local government debt, the property market correction and deleveraging.

After 30 years of double-digit growth, China has taken on the task of steering the country on a more sustainable growth path. Its leaders have stated that under 8 per cent growth rates are now the "new normal" and the growth target for this year is expected to be lowered to 7 per cent.

Chinese Premier Li Keqiang reassured a floor of global chief executive officers at the World Economic Forum in Davos, Switzerland last month that no regional or systemic financial crises would occur and that China would avoid a hard landing. Nonetheless, the latest data suggests that the downturn might be deeper than expected.

The manufacturing PMI reading is all the more worrying since analysts expected companies to front load ahead of the Chinese New Year, an action which should technically have inflated the PMI figure.

Seasonal reasons, falling commodity prices, and weak domestic and international demand caused the decline in the manufacturing PMI, Zhao Qinghe, with the NBS, said in a statement.

All major sub-indexes fell last month, including new orders and new export orders. The sub-index of raw material purchasing prices decreased to 41.9.

A separate official services PMI, also released last week, showed that growth in the services sector fell to a one-year low in January.

The official non-manufacturing PMI fell to 53.7 in January, from 54.1 in December. Until now the services sector had resisted the slowdown as much of the government's efforts have been focused on shifting growth from overcapacitated industries to more profitable enterprises in the services sector.

The flash HSBC PMI reading published earlier in January, while slightly better than in December, also remained in sub-contraction territory. The preliminary reading came in at 49.8 last month, up from 49.6 in December.

Discrepancies often exist between the indices as the official index covers a larger panel of companies and is more geared towards larger state-owned enterprises than the HSBC index.

Though until now Beijing has restrained from implementing any major stimulus measures, analysts now expect some loosening of monetary policy including interest rate and reserve requirement ratio cuts in the first half of this year.

"The data suggests that the manufacturing slowdown is still ongoing amidst weak domestic demand," Qu Hongbin, HSBC economist in Hong Kong, said after release of the flash PMI, which covers 80-90 per cent of respondents. "More monetary and fiscal easing measures will be needed to support growth in the coming months." The final HSBC PMI figure is due out Monday.

The People's Bank of China, the country's central bank, has recently been injecting liquidity into the banking system to spur growth. The State Council, China's Cabinet, recently announced a package of measures to support overseas direct investment in railway, nuclear and other infrastructure industries.

"We (think) the People's Bank of China will cut the reserve requirement ratio by 50 basis points and cut the deposit rate by 25 basis points in the first quarter," ANZ economists said after the release of the latest data.