China's manufacturing sector shrinks further in September

Hong Kong

CHINA'S manufacturing sector continued to contract in September, two separate reports showed on Thursday, as the world's second largest economy grapples with weak external demand and structural weaknesses.

The final Caixin/Markit manufacturing Purchasing Managers' Index (PMI) for September fell to a six-and-a-half year low of 47.2, versus an earlier flash estimate of 47.

The official PMI, more geared towards bigger state-owned enterprises, edged up to 49.8 last month, from August's three-year low of 49.7. While it is still too soon to call a rebound in the economy, economists welcome the bounce, saying easing measures implemented over that past 18 months might finally be trickling in.

An index below 50 indicates activity is shrinking on a monthly basis, while one above indicates expansion.

"Today's better-than-expected official PMI is consistent with our view that policy easing is helping to shore up economic activity," wrote Julian Evans-Pritchard, economist with Capital Economics, after release of the data. "Looking ahead, we expect sentiment to begin to improve gradually over the coming months as the stock market stabilises and recent policy support measures continue to feed through into stronger economic activity," he added.

Markets had anticipated the official PMI to fall further compared to the previous month and though Shanghai and Shenzhen were closed for a public holiday, stock markets responded positively to the news.

Beijing, in order to avoid any hard landing of its economy - which has been growing its slowest pace in 25 years - has been easing its monetary policies by lowering interest rates and reserve requirement ratio for banks. It has also launched targeted investment projects such as railways and social housing.

But on the ground these measures have yet to be felt. Corporates are heavily indebted from years of careless lending by banks and overcapacity continues to cripple most sectors of the economy. Other economic data including trade, factory output or PPI points to persistent weaknesses. Meanwhile disappointing export data shows that the global recovery remains fragile.

Thursday's official PMI shows a slight pick-up in output and new orders which means better sentiment among some of China's manufacturers. Output rose to 52.3 from 51.7 previously and new orders were up to 50.2.

But the Caixin/Markit PMI still paints a sombre picture of the economy with new export orders the biggest contributor to the decline. The new business sub-index fell in September to the lowest reading since July 2014, while prices charged fell back into contraction in September, compared with slight price increases in July and August. This flash gauge of a purchasing managers index, compiled by Markit Economics and sponsored by Caixin Media, is being discontinued. Markit said in a statement on Thursday that the Sept 23 flash release was the last.

Input prices are still rising but at a three-month low. More worryingly the services sector PMI fell to 50.5, down from 51.5 in August. This is the lowest reading since July 2014, and a sign that the slowdown which until now had had little repercussion in the services sector could be affecting the Chinese economy as a whole.

"The bigger news from the data may be the slowdown in services. The data are a reminder that the downside risks to China's economy remain significant and are not just concentrated in manufacturing," said John Zhu, China economist with HSBC.

China's over-reaction to a stockmarket crash over the summer and a surprise currency devaluation have done nothing to reassure investors inside and outside China which remain very cautious on the outlook.

Earlier this week, IMF chief Christine Lagarde said Beijing must safeguard "demand and financial stability" and continue rebalancing its economy.

Beijing has embarked on a new road of reforms to make the Chinese economy more reliable on domestic demand and less on state-led investment. That means changing its economic structure and accepting slower growth rates while new more value-intensive industries emerge.

Economists expect third-quarter GDP out later this month to fall below the official government target of 7 per cent with a rebound later this year as support measures kick in, but insist Beijing has more room to roll out stimulus measures.

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