Monday 28 May 2018

China's factory gauge signals yet more contraction

Premier Li Keqiang's goal is 7pc growth for 2016
Premier Li Keqiang's goal is 7pc growth for 2016

Penny Peng

China's first official economic report of 2016 suggested manufacturing weakened for a fifth straight month in December, the longest such streak since 2009, even as a separate gauge tracking services rose to the best level in more than a year.

The purchasing managers index edged up to 49.7 last month from a three-year low of 49.6 in November, China's national bureau of statistics said last week. That compared with a median estimate of 49.8 in a Bloomberg survey of economists. 

The non-manufacturing PMI, meanwhile, rose to 54.4 - the highest since August 2014. Numbers below 50 indicate deterioration.

The slight improvement in the sluggish manufacturing sector follows stepped-up stimulus including six People's Bank of China interest-rate cuts. Policymakers trying to meet Premier Li Keqiang's goal of about 7pc growth this year are also facing pressure from employment, which has been steady thanks to a resilient services sector.

Economists said the continued contraction portends more monetary and fiscal support.

"Growth momentum is stabilising somewhat - however as the index remained below 50 for five consecutive months, the manufacturing sector is still facing strong headwinds," said Zhou Hao, an economist at Commerzbank AG in Singapore. While the manufacturing PMI showed improvement on both the supply and demand sides, downward pressure remains significant for the sector, the statistics bureau said.

Some manufacturers' operations were affected by the decline in crude oil prices, continuous drops in the wholesale and raw material purchase price indexes, as well as tightening liquidity at the end of the year, according to the NBS.

"The improvement in the index suggests growth momentum has continued to stabilise, in part due to China's stimulus efforts," said Fielding Chen, an economist with Bloomberg in Hong Kong.

"Nevertheless, another reading below the 50 threshold that separates expansion and contraction suggests the economy stays broadly weak."

The stabilisation suggests that while the government is likely to achieve its 2015 growth target, the economy faces "substantial downside risks," and top officials have already signaled their intention to implement more accommodative policies in 2016, Chen said.

The increase in December lifted the manufacturing gauge from the lowest level since August 2012 and brought the average reading for 2015 to 49.9.


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