Activity in China’s factory sector unexpectedly shrank to a six-and-a-half year low this month, a private survey showed, raising fears of a sharper slowdown in the world’s second-largest economy that could spell more turmoil for financial markets.
The preliminary Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) fell to 47.0 this month, the worst since March 2009 and below market expectations of 47.5 and last month’s final 47.3. A reading of less than 50 signifies a contraction.
China’s factory activity has now shrunk for seven months in a row, and the latest survey showed conditions this month deteriorated from last month by almost every measure, with companies cutting output, prices and jobs at a faster pace as orders fell.
“The weaker-than-expected PMI suggested domestic and external demand remained sluggish. It’s almost certain China’s economic growth will slide below 7 percent in the second half of this year,” economists at Minsheng Securities Co (民生證券) said.
“To achieve the growth target, we expect authorities to keep loosening monetary policy, with more measures on the fiscal front in coming months,” they added.
The latest data showed factory output sank to its lowest since the global financial crisis and soft orders suggested more weakness ahead.
New orders, a proxy for both domestic and international demand, fell to a near four-year low, while export orders shrank at the fastest clip since mid-2013, highlighting weak global demand.
US crane and mining equipment maker Terex Co’s China president told reporters on Monday that he expects half of the country’s machinery makers to close amid a four-year market downturn, although he remained optimistic for the longer-term.
“Everyone thinks it’s a market that is declining, but it’s still growing. It’s declining growth,” Ken Lousberg said.
The dismal PMI reading raises the chance that third-quarter economic growth could dip below 7 percent for the first time since the global crisis. Some market watchers believe current growth is already weaker than official data suggest.
“The PMI’s new leg down is consistent with a further deceleration in Chinese growth through year-end 2015,” PNC Financial Services Group Inc economist Bill Adams said. “PNC forecasts roughly 6.5 percent growth in the third and fourth quarters of 2015 [in year-ago terms] and 6.2 percent in all of 2016.”
The weak PMI will reinforce views that Beijing will roll out more support soon, including further cuts in interest rates and bank reserve requirements and higher infrastructure spending.
“Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness,” Caixin Insight Group (財新智庫) chief economist He Fan (何帆) said.
Nomura Holdings Inc expects one more 50-basis-point cut in bank reserve requirements in the fourth quarter, while RBC Capital Markets predicted another 25-basis-point interest rate cut and at least 50-basis-point reserve cuts.
While the factory sector looks set to remain weak for some time, there are mixed signals in other parts of the economy.
The latest survey by China Beige Book International showed continued robust growth in the service sector in the third quarter, although some small companies elsewhere have told reporters business conditions have never been so bad.
Home sales and prices are slowly recovering, but new construction starts are down nearly 17 percent from a year ago.
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