China Manufacturing Falters In March: HSBC PMI Shows

 @moranzhang
on March 22 2012 9:33 AM
China
China posted a surprising trade surplus in March. REUTERS

China's factory activities slumped for the fifth consecutive month as weakening domestic demand continued to weigh on growth, according to the HSBC flash purchasing managers index.

Spooked investors moved quickly out of riskier assets like stocks, while hoping for further monetary easing from Beijing.

The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell in March to 48.1, a four-year low, compared to a final reading of 49.6 in February, HSBC Holdings PLC (NYSE: HBC) announced Thursday.

With new export orders sluggish and domestic demand still softening, China's slowdown has yet to finish. This calls for further easing to come from Beijing, HSBC chief economist for China Qu Hongbin said in a statement.

A reading below 50 indicates contraction from the previous month, while anything above that indicates growth.

The March reading marks the fifth straight month the index has contracted.

Slowing manufacturing production is clearly deterring enterprises from hiring, as the employment index slipped to a post-March 2009 low, Qu said.

Qu forecasts that China's central bank will cut the bank reserve requirement ratio by a total of 100 basis points in the coming months, given that a sharp resumption of inflationary pressures is unlikely. A basis point is one-one hundredth of a percentage point.

Overall new orders, the key drag to the headline figure, reached a four-month low of 46.1 in March. The output sub-index dropped to 47.9 following February's temporary rise to 50.2. Both factors held back hiring activities, the sub-index for which plunged to a post-March 2009 low of 48.6, compared to 51.1 in February.

Meanwhile, China's external demand is still slowing, although its rate improved in March as the new export orders print rose to 48.7, up from February's 8-month low of 47.5.

The drop in overall new orders, which was steeper than the drop in new exports-only orders suggests China's slow-down remains more of a domestic issue than an export-based one.

The only relief offered in this month's PMI reading is that the pace of input destocking slowed for the fourth consecutive month, while finished goods inventory went back into contraction, which both suggest that a restocking boost could be around the corner.

Near-term risks for the world's second largest economy remains, Qu said.

Property investment is set to weaken further in the coming months, with households' willingness to buy a home at a post-1999 low, according to the latest Chinese central bank survey. Bank lending restrictions are still hampering credit creation to an extent.

Tight liquidity conditions and dampened demand from the corporate sector suggest that March's new lending will likely only be slightly higher than January to February's average of 725 billion yuan ($115 billion).

External demand continues to deteriorate. January to February's exports growth witnessed a much weaker than expected year-on-year growth rate of 6.9 percent, with shipments to China's biggest trading partner, Europe, contracting by 1.1 percent year-on-year.

We expect exports to continue to grow at a single-digit pace in the coming months, Qu said.

With the consumer price index easing to a 20-month low and the producer price index at 0 percent in February, inflation is unlikely to be a major concern in the near future, providing ample room for Beijing to enact more aggressive easing measures.

Despite the National Development and Reform Commission's recent upward adjustment of domestic gasoline and diesel prices, we still expect March's CPI to stay well below 4 percent as a result of soft domestic demand for other goods, Qu added.

China's Hang Seng stock index was up 44.93 to 20,901.56. European stocks were sharply lower on the Chinese PMI report, and U.S. stocks opened lower.

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