China’s factory gauge extended its stretch of deteriorating conditions to a record seven months while a measure of services fell to the weakest in seven years, underscoring the challenge for policymakers as they seek to cut overcapacity in manufacturing without derailing growth.
The manufacturing purchasing managers’ index (PMI) dropped to 49 last month, missing the median estimate of 49.4 in a Bloomberg News survey of economists. It has not been weaker since January 2009. Numbers below 50 indicate conditions worsened.
In a sign China’s slowdown is spreading, the non-manufacturing PMI — which has been outperforming the factory measure — fell to the lowest level since December 2008.
The People’s Bank of China late on Monday stepped up efforts to cushion demand amid plunging stock prices and a weakening currency, freeing up the amount of cash the nation’s banks can lend.
The Chinese National People’s Congress is to gather on Saturday, where plans for this year and the next five years are to be outlined.
“Policy will continue to be expansionary and the focus is moving from currency and supply-side reforms to demand-side stimulus,” Macquarie Securities Ltd Hong Kong-based head of China economics Larry Hu (胡偉俊) said.
“Upcoming data will continue to show a slowdown in the economy,” Hu added.
Seasonal effects might have distorted the readings, as the week-long Lunar New Year break took place last month.
“This falls into our expectation that the Chinese New Year holiday had a negative impact on manufacturing as factories closed,” Natixis SA Hong Kong-based senior economist for greater China Iris Pang said.
“On the other hand, the holiday was positive for the services sector, because it boosted holiday spending and domestic tourism,” Pang added.
Still, the services gauge slipped from 53.5 in January to 52.7 last month. Measures of new orders, selling prices, employment, backlogs and inventories were below the 50 dividing line between improving and worsening conditions.
A separate manufacturing reading from Caixin Media Co Ltd and Markit Economics fell from 48.4 in January to 48 last month.
“Early signs suggest stimulus has yet to gain significant traction, pointing to the need for continued and expanded policy support,” Bloomberg News economists Tom Orlik and Fielding Chen (陳世淵) wrote in a note.
“In the near term, that likely means the announcement of a larger fiscal deficit target at the National People’s Congress on Saturday, plus stealth moves to guide lending rates lower,” they said.
On the official manufacturing measure, the new orders, employment and purchasing quantity components slipped.
The readings dashed hopes a lending binge in January would flow through to boost activity.
The credit surge “is having an underwhelming impact on the economy,” said Victor Shih (史宗瀚), a professor at the University of California, San Diego who studies China’s politics and finance.
“The problem may be that investment is increasingly state driven, which only benefits a small handful of state-owned enterprises. The private sector is still suffering from deflationary pressure,” Shih said.
The central bank said it lowered the reserve requirement ratio to guide stable and appropriate growth in credit and create appropriate monetary and financial conditions for supply-side structural reform, according to a statement on its Web site late on Monday.
China’s benchmark money market rate declined, while the Shanghai Composite Index climbed 1.7 percent.
The central bank has also been trying to restore stability to the nation’s currency after outflows hit a record pace in recent months, restraining its capacity to lower benchmark interest rates.
“Delayed monetary easing has contributed to a weakening of growth momentum,” ING Groep NV Singapore-based head of Asian research Tim Condon said.
“The authorities will be hoping that exchange rate policy has calmed depreciation expectations sufficiently to free their hand for more aggressive easing, which the economy manifestly needs,” Condon said.
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