Growth in China's production sector remains weak

Beijing

GROWTH of China's millions of manufacturers remained anaemic last month as the trade war hit both domestic and global demand and with stimulus measures yet to be factored into the real economy.

The Caixin/Markit PMI which surveys China's smaller and private manufacturers edged up slightly last month to 50.2 from 50.1 in October due to a timid pickup of domestic demand.

The official version of the PMI which was published last Friday contracted for the first time in over two years to 50 from 50.2.

The 50-point mark is considered neutral territory, indicating no growth in activity or contraction on a monthly basis.

Though the Caixin PMI did fare better than expected, analysts say this does not necessarily mean the economy has bottomed out and to expect a further slowdown of growth in the coming quarters.

"We are sceptical that domestic headwinds have now abated. If anything, the drags from a cooling property market and slower credit growth are likely to intensify in the coming months," said Julian Evans-Pritchard with Capital Economics.

The sub-index for measuring new orders improved to 50.9 in November from 50.4 the previous month, the Caixin version of the PMI showed as manufacturers cut prices to ease pressures on inventories while the other sub-indices all point to softer growth looking forward.

In the Caixin PMI, the sub-index for new export orders shrank to 47.7 from 48.8 while the output prices sub-index fell below the 50-mark to 49.8 in November, pointing to future pressures on profit margins in the first half of next year. The gauge on overall production fell to 50.0 from 50.1 in the previous month.

In the official PMI, the employment sub-index slipped to 48.4 in November from 48.8 in October as factories shed off workers. Meanwhile, the sub-index for new orders dropped to 50.4 and the production sub-index fell to 51.9 in November from 52 in October. New export orders shrank for a sixth straight month.

China is struggling to adjust to slower growth rates amid restructuring of its economy, all the while dealing with a trade war - which is now well into its third month - with its main trading partner, the United states. Both countries have levied tariffs on billions of dollars of each other's goods this year and the Trump administration has threatened to extend taxes on all Chinese imports.

Despite a framework to reach a deal within the next 90 days which was decided by Donald Trump and Xi Jinping over the weekend at the G-20 summit, analysts don't see the trade tensions substantially easing and expect downward pressures on the economy to continue.

"We maintain our view for the US-China trade dispute to remain a long-drawn conflict, seeing the ceasefire agreed as just a lull before the next escalation", said Fitch Solutions in a note to client.

To offset any hard landing of the economy, which could spark social unrest, the government has launched a series of fiscal measures over the past year including tax breaks, loosening credit conditions and boosting investment.

While these should trickle into the economy in the coming quarter analysts expect more downside risks on the economy as domestic demand remains tepid. They say there is still more room for further easing as inflation is low.

"We continue to expect more reserve requirement ratio cuts to come next year, with the earliest one in January 2019," ANZ economists Betty Wang and Raymond Yeung said in a note to clients on Monday.

While China should reach its growth target of 6.5 per cent this year, economists agree that GDP will soften in 2019.

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