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China's manufacturing activity slows down to 11-month low

By K J M Varma
March 24, 2015 16:53 IST
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ChinaChina's manufacturing activity in March fell to an 11-month low as the world's second largest economy continued to slowdown causing global concerns and putting pressure on the government to further ease monetary policy.

HSBC's preliminary purchasing managers' index was released on Tuesday, signaling weaker growth momentum and pressure on policymakers to further ease policies.

The British bank's preliminary purchasing managers index for March came in at 49.2, it said in a statement, below the breakeven point of 50 and the weakest reading since last April, when it hit 48.1.

A reading above 50 indicates expansion while a reading below that represents contraction.

The March reading -- the first data point since China's Spring Festival free of holiday distortions -- suggested that underlying demand has weakened further since late 2014, according to an HSBC research note.

"Weak domestic demand was the main reason for Tuesday's low reading. New orders fell into contraction, while the output sub-index also moderated from the January-February average of 51," the HSBC research note said, state-run Xinhua news agency reported.

New orders in March fell to an 11-month low of 49.3 from 51.2 in February, while the output sub-index stood at 50.8 in March, down from 51.7 in February, representing a two-month low, according to the monthly report.

The weak domestic demand is putting downward pressure on the labour market, with the employment sub-index falling from 49.8 in February to 47 in March, the lowest level since September 2014, HSBC said.

The PMI 'signalled a slight deterioration in the health of China's manufacturing sector in March,' Annabel Fiddes, an economist said.

"A renewed fall in total new business contributed to a weaker expansion of output, while companies continued to trim their workforce," Fiddes told Xinhua.

The view was echoed in a Barclays report, saying that ‘the deteriorating PMI confirmed that downside risks to China's 2015 growth rate have started to materialise.’

Barclays recently revised down its 2015 China gross domestic product growth forecast to 6.8 per cent from 7 per cent in view of likely weaker-than-expected Q1 growth.

It expected downside risks, including a property market correction and elevated local government debt, to prevail in the near term, though the slowdown is partially cushioned by more government-led infrastructure investment.

China's gross domestic product expanded 7.4 per cent last year, the lowest since 1990. The annual economic growth target for 2015 was set at around 7 per cent, roughly half a percentage point lower than last year.

To halt the economic slowdown and the onset of deflation risks, the People's Bank of China has cut the benchmark interest rates twice and dropped the reserve requirement ratio for banks over the past four months.

Some analysts expect more easing moves.

Barclays forecasts that the next RRR cut could happen in the coming weeks and expects more RRR cuts in the event of weaker economic performance and persistent capital outflows.

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K J M Varma in Beijing
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