Twin measurements of China’s economic health made grim reading today as factory activity contracted at the fastest pace for four years, while the services sector, Beijing’s big hope to revive the stuttering economy, grew at its slowest rate for seven years. Smaller companies laid off workers at the quickest rate for seven years.
The figures will increase pressure on policymakers to announce further stimulus measures at the upcoming annual session of China’s rubber-stamp parliament. On Saturday, premier Li Keqiang is expected to unveil a growth target range of 6.5 per cent to 7 per cent in 2016, still impressive by global standards but the lowest in a quarter of a century for China, which has raced over that time to become the world’s second-largest economy and a key driver of global growth.
The government’s official Purchasing Managers’ Index (PMI) fell to 49.0 in February, down from 49.4 in January and the weakest reading since November 2011. The breakeven point of 50 separates expansion from contraction, where the official PMI has now remained for seven straight months, the longest slump on record.
Another worrying sign was the non-manufacturing PMI, which stayed in positive territory but slipped to 52.7, from 53.5 in January, the weakest level since December 2008. Services have been outperforming manufacturing as China seeks to move away from heavy industry and reduce massive overcapacity in several older sectors of its economy.
A separate, private survey, also released today, further deepened the gloom. The Caixin/Markit China Manufacturing PMI was 48.0 for February, down from 48.4 in January. The reading marked a five-month low and 12 consecutive months of contraction. The Caixin index focuses on small and medium-sized private companies, while the official PMI figure is based more on state-owned enterprises and large companies.
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Analysts said China’s recent lunar New Year holiday slowed output for weeks, but the wider trends remain bleak. “While seasonal effects could have distorted the reading, as the country celebrated Chinese New Year for a week in February, the run of below 50 readings underlined the weak manufacturing narrative,” wrote Bernard Aw, IG’s market strategist in a note.
“The index readings for all key categories including output, new orders and employment signalled that conditions worsened, in line with signs that the economy’s road to stability remains bumpy,” said He Fan, an economist at Caixin Insight Group. Beijing must press ahead with reforms, moderate stimulus policies and stronger support of the economy “to prevent it from falling off a cliff”, he wrote.
“A proactive fiscal policy will be needed to support investments and we expect the fiscal deficit could be increased to a range of 3-4 per cent in 2016, from 2.3 per cent in 2015,” said ANZ economists Raymond Yeung and Louis Lam.
February’s decline in output and total new orders contributed to “the quickest reduction in staffing levels since January 2009”, according to Caixin. Unemployment represents a rising concern for Beijing which expects to lay off 1.8 million workers in the coal and steel industries, the government announced on Monday.
China’s central bank cut the reserve requirement ratio on Monday to boost liquidity and stabilise the economy. The move followed a Group of 20 meeting in Shanghai at the weekend where finance chiefs pledged to use “all policy tools” to strengthen global recovery but agreed no new plan to spur growth.
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Don’t blame China for the global economic slowdown, but work with Beijing to revive common fortunes, argued an opinion piece in the state news agency Xinhua yesterday.
“China will by no means encounter overwhelming economic crisis nor recession, thanks to its huge economic aggregate, current market opening and social reform, people’s lasting passion for innovation, as well as highly effective government controls,” said Xinhua. “It is advisable that some countries stop pointing fingers at China and abandon the notorious zero-sum mindset.”