Chinese factory production deteriorated in February for a record seventh consecutive month, hammering the country’s manufacturing purchasing managers index (PMI) to its lowest level since January 2009. Also, China's nonmanufacturing PMI dropped to its lowest level since December 2008, according to the government.
The decline surprised analysts. The official PMI last month fell to 49, but Reuters had forecast a reading of 49.3. A PMI below 50 indicates factory activity has contracted, while a number above 50 indicates expansion.
China’s January PMI came in at 49.4. The Caixin manufacturing PMI, a private gauge, offered a similar assessment, with a reading of 48 for February, compared with 48.4 in January.
The decline indicates that policymakers will continue to face challenges maintaining the growth rate of the world’s second-largest economy as they attempt to shift it from one based on manufacturing to one based on services. The country’s central bank attempted to improve liquidity late Monday, freeing cash for lending by cutting the required reserve ratio by half a percentage point, to 17 percent for the country’s largest banks.
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“Companies that reported lower output generally cited weak market conditions and reduced intakes of new work,” Caixin noted in a statement, adding, “Total new business declined for the eighth month in a row, albeit at a modest pace that was similar to January.”
Some analysts have also cited seasonal factors, such as the weeklong Lunar New Year holiday in February, as contributing to the slowdown in factory activity. Others argue that the deterioration is representative of a broader problem in the Chinese economy. For example, the government announced Monday that state-owned businesses would lay off 1.8 million coal and steel workers, due to an oversupply of labor.
“China's economy is going to continue struggling,” Pu Yonghao, partner and chief investment officer at Fountainhead Partners, told CNBC. “Aside from boosting real estate demand in tier-one cities, authorities are going to find it difficult to manage this downward trend.”