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China Manufacturing Gauge Signals Economic Weakness

April 23, 2014

China Manufacturing Gauge Signals Weakness Persists in Economy

Workers assemble and package mechanical pencils at the A.W. Faber-Castell Stationery Co. factory in Guangzhou, Guangdong province, China. Photographer: Brent Lewin/Bloomberg

China’s economy has yet to respond to policy makers’ stimulus efforts, an April manufacturing gauge indicated today, helping send the yuan to a 16-month low.

The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was 48.3 in April, matching the median estimate of analysts surveyed by Bloomberg News. The reading rose from March’s final figure of 48 while remaining below the expansion-contraction dividing line of 50.

Sustained weakness in manufacturing would pressure Premier Li Keqiang to expand pro-growth measures beyond a required-reserves cut for rural banks yesterday and what some analysts have dubbed a “mini stimulus” package of railway spending and tax relief. The report followed data last week showing China’s expansion moderated to the slowest pace in six quarters.

“We do not believe that this uptick in the HSBC PMI signals any sort of turning point for the economy and continue to believe that growth momentum is on a downtrend,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note today. He reiterated his forecast for a broader reserve-ratio cut for banks in May or June.

Estimates of today’s number from 25 analysts ranged from 47.5 to 49.4.

The yuan weakened 0.1 percent to 6.2435 per dollar at 1:20 p.m. in Shanghai and earlier touched 6.2465, the lowest since December 2012. The Hang Seng Index dropped 0.9 percent in Hong Kong, while the Hang Seng China Enterprises Index, also known as the H-share index, declined 1.3 percent.

Spending Package

The State Council, or cabinet, on April 2 outlined a package of spending on railways and housing and tax relief to support growth. The government said April 20 that China will start construction on a batch of major energy projects as part of efforts to stabilize expansion and adjust the nation’s energy structure.

The People’s Bank of China yesterday cut the reserve-requirement ratio for some rural banks by as much as 2 percentage points, effective April 25. Nomura estimated the move will unlock as much as 90 billion yuan ($14 billion), while a nationwide reserve-ratio reduction would release about 550 billion yuan.

If growth keeps slowing, “it will probably become a further nudge in the elbow towards more easing,” Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, said on Bloomberg Television.

Shadow Banking

China is trying to balance supporting growth with curbing shadow banking, eliminating overcapacity and reducing pollution. The economy is forecast to expand 7.4 percent this year, according to a Bloomberg survey of analysts last month, which would be the slowest pace since 1990. Growth was 7.7 percent in 2012 and 2013.

The manufacturing report, known as the Flash PMI, is typically based on 85 percent to 90 percent of responses to surveys sent to purchasing managers at more than 420 companies. The final reading will be released on May 5.

“Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident as both new export orders and employment contracted,” said Qu Hongbin, an economist at HSBC in Hong Kong. He said that more measures may be unveiled in coming months to support growth.

Annual Expansion

Signs in the PMI of a contraction don’t indicate that manufacturing is shrinking on an annual basis. Factory output rose 8.8 percent in March from a year earlier.

China’s economy grew 7.4 percent in the first quarter from a year ago, the statistics bureau said April 16.

Premier Li said last week that the government isn’t considering stronger stimulus and that growth a bit higher or lower than 7.5 percent can be deemed to be in a reasonable range, according to a government statement after a State Council meeting. China will maintain a “prudent” monetary policy and a “proactive” fiscal stance and will ensure the 2014 growth target can be reached through reform and changes to the structure of the economy, Li said.

Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said today’s report shows “marginal improvement” and the HSBC index, which has a “downward bias” because it concentrates on smaller exporters, will gradually rise to the 49-50 range in coming months. The economy is likely to grow about 1.8 percent this quarter from the previous period, up from a 1.4 percent pace in January-to-March, Lu wrote in a note.

On May 1, the National Bureau of Statistics and China Federation of Logistics and Purchasing will publish their own survey of purchasing managers at about 3,000 manufacturing companies. The official gauge’s March reading was 50.3, after an eight-month low of 50.2 in February.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at

To contact the editors responsible for this story: Paul Panckhurst at Scott Lanman, Rina Chandran

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