China's factory activity shrinks for 5th month, raises pressure for more stimulus

Workers direct a crane lifting ductile iron pipes for export at a port in Lianyungang, Jiangsu province, China June 30, 2019. REUTERS/Stringer /file photo

By Ellen Zhang and Joe Cash

BEIJING (Reuters) -China’s manufacturing activity in February contracted for a fifth straight month, an official factory survey showed on Friday, raising the pressure on policymakers to roll out further stimulus measures as factory owners struggle for orders.

The official manufacturing purchasing managers’ index (PMI), complied by the National Bureau of Statistics (NBS), fell to 49.1 in February from 49.2 in January, below the 50-mark separating growth from contraction and in line with a median forecast of 49.1 in a Reuters poll.

Seasonal factors may have affected the figure, as the Lunar New Year (LNY) fell on Feb. 10 this year and saw factories shut as workers returned home for the holiday.

However, a survey by the Caixin/S&P Global released just after the official PMI showed manufacturing activity expanded steadily as both production and new orders grew faster.

Taken together, the PMIs highlighted an uneven economic recovery.

“Lunar New Year definitely played an important role. Usually that’s the month when you see a PMI dip,” said Dan Wang, chief economist at Hang Seng Bank China.

Wang said the dip in the official PMI was also due to a sharp contraction of new foreign orders. “Weakened demand from overseas seems to be a permanent, rather than temporary phenomenon” because of the economic slowdown in developed markets as well as the relocation of domestic supply chains.

New export orders have shrunk for 11 consecutive months in the NBS manufacturing PMI, while a year-long contraction in employment in the factory sector pointed to persistent strain on businesses.

China’s disappointing post-COVID recovery has raised doubts about the foundations of its economic model and stoked expectations policymakers will need to consider bolder reforms to underpin longer term growth.

The world’s second-biggest economy has been grappling with sub-par growth over the past year amid a property crisis and as consumers hold off spending, foreign firms divest, manufacturers struggle for buyers, and local governments contend with huge debt burdens.

The official non-manufacturing PMI, which includes services and construction, rose to 51.4 from 50.7 in January, marking the highest reading since September last year, thanks to robust activity during the LNY holidays.

However, construction activity nudged down by 0.4 percentage points as property-related activity was still in contraction, an NBS statement said.

Policymakers have pledged to roll out further measures to help shore up growth after the steps implemented since June had only a modest effect.

The People’s Bank of China cut the reserve requirement ratio (RRR) for banks by 50-basis points on Feb. 5, the biggest in two years, releasing 1 trillion yuan ($139.03 billion) in long-term liquidity.

China’s President Xi Jinping on Friday chaired a meeting of a key economic policy making body on supporting manufacturers through equipment upgrades and lowering logistics costs, part of his push to rebalance the economy through harnessing technology to bring about productivity gains and income increases.

China won’t release its 2024 growth target till next Tuesday, but policy insiders expect Beijing to maintain a similar growth target to last year of around 5%.

($1 = 7.1925 Chinese yuan renminbi)

(Reporting by Ellen Zhang and Joe Cash)