This ad will auto close in 10 seconds

China factory output shrinks, again: Survey

Last Updated: Thursday, December 15, 2011 - 11:52

Beijing: China's factory output shrank again in December after new orders fell, a preliminary purchasing managers' survey showed, entrenching expectations that manufacturers are struggling with waning global demand and tight domestic credit conditions.

The HSBC flash manufacturing purchasing managers' index, the earliest indicator of China's industrial activity, stood at 49 in December, a modest rise from November's 47.7 but pointing to a monthly contraction in activity nonetheless.

A PMI reading of 50 demarcates expansion from contraction.

Underlying indices showed factories were hit by an outright fall in domestic new orders, while growth in new export orders slowed. New orders shrank for the second straight month with the sub-index at 47.4.

New export orders grew in the month, but barely, as the sub-index clung just above the 50 level. Sub-indexes for output and employment hovered around 50 as well, while those for input and output prices were well below 50.

"The growth momentum remains weak with additional downside risks from exports and the property market not yet fully filtering through," said Qu Hongbin, chief China economist at HSBC.

"With inflation quickly shifting to disinflation, the Chinese government can and should make more aggressive easing on both fiscal and monetary fronts to stabilize growth and jobs."

The lacklustre data briefly pushed shares in Shanghai .SSEC and Hong Kong .HSI to deeper losses, but market reaction was otherwise muted.

The flash PMI is the latest piece of data to show growth in the world's second-largest economy losing steam. Official data showed growth in China's industrial output and exports at their weakest in at least two years in November.

The across-the-board pullback in activity has fuelled expectations that China would take more forceful measures to bolster economic growth and save jobs if Europe's debt crisis worsens markedly.

Choppiness Ahead

The slight improvement in December's PMI is in line with trends in China's economy. Factory output typically weakens in November as manufacturers process the last of their Christmas orders, paving the way for a rebound in production in December.

But economists warned investors against thinking that industrial output is near a bottom and set to recover.

Instead, Liu Li-gang, an economist at ANZ in Hong Kong, said production is likely to soften again in January when Chinese factories break for the Lunar New Year holiday, setting the scene for another bounce in production in February.

"To see a real rebound in activity, we will have to see monetary policy being eased hand in hand with it," Liu said. "It's more important for the People's Bank of China to stimulate domestic investment."

Beijing has promised to do what it can to foster growth. It concluded its policy-setting conference on Wednesday with a vow to "guarantee" growth in the face of an "extremely grim" outlook for the world economy.

It reduced the amount of cash that banks have to hold as reserves in November for the first time in three years in a bid to shore up cooling economic activity.

Analysts believe more cuts in banks' reserve requirements could be in store. A Reuters poll of 19 analysts showed a median forecast for the reserve requirement ratio to fall 150 basis points next year, from 21 percent now.

The HSBC flash PMI for December gives an even earlier snapshot of China's factory sector than usual. It is typically released in the last week of each month but publication was brought forward in December ahead of the year-end holidays.

The flash survey is based on up to 90 percent of total responses to a monthly survey.

Bureau Report

First Published: Thursday, December 15, 2011 - 11:52
comments powered by Disqus