China's manufacturing sector contracts further in February

Beijing

CHINA'S purchasing managers' index (PMI) contracted for a third straight month in February, two surveys show as the trade war with the United States persists.

China's official PMI which surveys larger state-owned firms fell to a three-year low as it dropped to 49.2 last month, from 49.5 in January.

A private version of the survey published by Caixin and Markit fared slightly better, with manufacturing picking up to 49.9, from 48.3 in January, though all the while staying in contraction territory. A reading below 50 signals contraction, while a reading above that level indicates expansion.

China's growth has been slowing for the past years as the government has steered its economy towards consumption rather than investment. Beijing has deleveraged its local government and banking debts while supporting growth in high-tech sectors.

The slowdown accelerated over the 12 months after US President Donald Trump launched an offensive on Chinese imports by taxing millions of dollars worth of products.

China's gross domestic product (GDP) grew 6.6 per cent last year, its slowest rate since reforming the decades ago.

Despite a slew of fiscal and monetary measures to support enterprises and consumers over the past quarters, there have been little signs that growth has bottomed out, with much of the economy still feeling the pinch from the trade war.

Some of the PMI sub indices did rebound last month, such as new orders in both sets of PMIs. However, analysts said that they doubt that the manufacturing sector will bottom out before the end of the first quarter.

They also caution against reading too much into data for the first two months of the year, as they are often distorted by the Chinese New Year holiday which sees the closure of millions of factories and disruption of production.

Other major sub indices including new export orders in the two surveys continued to sink for a ninth-consecutive month, reaching 45.2 in February from 46.9 for the official PMI.

"Unless the trade war truly turns into an extended truce, the weakening trend may not end quickly," said Iris Pang, an economist for Greater China at ING.

"We believe a trade deal, especially over the longer run, will be positive for both the Chinese and US economies. But this will not immediately reflect in economic data. This means we probably will have another month or two of bad PMI data before signs of improvement begin to emerge," she added.

Trade talks with the US are ongoing with a three-month truce expected to be extended at the end of March, while the two parties find a satisfactory deal.

While tensions have eased, a sustainable deal is far from certain. Earlier this week, Mr Trump said that he could end all discussions if China did not compromise enough.

"The official PMIs suggest that growth remains under pressure, and we expect conditions to weaken further in the coming months," said Julian Evans-Pritchard, an economist at Capital Economics. "While there are tentative signs that credit growth is now starting to bottom out, we don't think that will put a floor beneath growth until the middle of this year at the earliest."

The manufacturing data was released just days before China's parliament is set to convene. Top officials are due to reveal targets for 2019 and announce policies for the coming year this week. Analysts expect the GDP target to be lowered to 6.5 per cent.