China Factory Index Decline Adds to Li Growth Challenges

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An employee closes the door of an industrial washing machine at the Guangzhou Lijing Washing Machine Co. factory in Guangzhou, China. Close

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Photographer: Brent Lewin/Bloomberg

An employee closes the door of an industrial washing machine at the Guangzhou Lijing Washing Machine Co. factory in Guangzhou, China.

A Chinese manufacturing gauge fell to an eight-month low in February, adding to challenges for growth as Premier Li Keqiang prepares to map out the government’s economic strategy to the nation’s legislature.

The Purchasing Managers’ Index (CPMINDX) was at 50.2, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. That compared with January’s 50.5 reading and the 50.1 median analyst estimate in a Bloomberg News survey. A number above 50 signals expansion.

The data underscore the challenges facing the government as it tries to sustain expansion above Li’s 7 percent bottom line while implementing policies to rein in credit and overcapacity. The yuan’s biggest decline on record against the dollar in February may add to investor concerns that the economy is vulnerable to financial risks.

“The slowdown in manufacturing growth is due to a deceleration in investment, especially of credit-sensitive infrastructure and real-estate investment,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong. “But there’s no need to become overly concerned -- the government has the policy space it needs to ensure its bottom line on growth this year while retaining financial stability.”

China’s benchmark stock index slumped 2.7 percent last week, the biggest drop in seven weeks, amid concerns economic expansion will ease as banks tame lending and a weaker yuan spurs capital outflows.

Record Decline

The currency slid as much as 0.9 percent on Feb. 28, the largest decline since China unified official and market exchange rates in 1994, according to data compiled by Bloomberg. The yuan lost 1.3 percent in February, the biggest monthly drop on record, fueled by speculation the central bank will widen the currency’s trading band against the dollar to allow greater volatility at a time when economic growth is slowing.

The yuan’s fall, along with the recent drop in interbank interest rates and bond yields, “should be overall positive for growth,” even though the declines are more related to the central bank’s financial reform efforts, Lu Ting and Zhi Xiaojia, Hong Kong-based economists at Bank of America Corp. wrote in a report yesterday.

Premier Li will present his first annual work report to the National People’s Congress in Beijing on March 5, outlining the government’s plans for the economy after the ruling Communist Party set out its blueprint for reform at a summit in November. He will also announce a target for this year’s increase in gross domestic product.

‘Pro-Growth Policies’

If the goal is unchanged from last year’s 7.5 percent, “the government will have to roll out pro-growth policies, which will then delay the long-awaited structural reforms,” Australia & New Zealand Banking Group Ltd. economists led by Hong Kong-based Liu Li-Gang said in a report yesterday. “While low interest rates could help the corporates and exporters, they could fuel the shadow banking activities again.”

Economic expansion will ease to 7.5 percent this year from 7.7 percent in 2013, according to the median analyst estimate in a Bloomberg survey carried out from Feb. 14 to Feb. 19. That would be the weakest pace since 1990, reflecting the impact of government efforts to rein in surging credit, curb overcapacity and pursue longer-term policies to protect the environment and shift to a consumption-based growth model.

The government’s PMI is based on responses to questionnaires sent to purchasing executives of 3,000 companies. Estimates in a Bloomberg survey of 33 analysts ranged from a reading of 49.5 to 51.5.

Export Contraction

In yesterday’s report, a gauge of output slipped to 52.6 in February from 53 the previous month, while a subindex of new orders dropped to 50.5 from 50.9. A measure of new export orders had a below-50 reading for the third straight month, indicating a contraction.

The PMI for large companies fell to 50.7 from 51.4 the previous month. The gauges for small and medium-sized enterprises showed a contraction, in line with the preliminary reading of a separate manufacturing gauge released Feb. 20 by HSBC Holdings Plc and Markit Economics.

HSBC’s Flash PMI, which is weighted more toward smaller companies, fell to 48.3 from January’s final reading of 49.5. If confirmed tomorrow, it will be the lowest figure in seven months and the second straight below-50 reading.

Slumping Demand

BlueScope Steel Ltd. (BSL) Australia’s biggest steelmaker with 32 offices in China, said demand for industrial buildings and construction products is slumping in the world’s second-largest economy. Steel shipments from BlueScope’s engineered buildings unit fell 7 percent in China in the six months to December from a year earlier while volumes across Asia rose 10 percent, the company said in a Feb.24 statement.

Distortions caused by the timing of the Lunar New Year holiday contributed to the decline in the PMI as many companies stopped or reduced manufacturing as workers returned to their hometowns, Zhao Qinghe, a senior statistician at the National Bureau of Statistics, said on the agency’s website. The weeklong break began on Jan. 31 this year and Feb. 9 last year.

“We don’t think policy makers will attach a big weight to the PMI readings in January and February,” Bank of America economists Lu and Zhi said. Combined January and February data due over the next two weeks will provide “much more clarity,” they said.

The government will announce February trade numbers on March 8 and inflation figures on March 9. Combined January-February industrial output, retail sales and fixed-asset investment data will be released on March 13.

To contact Bloomberg News staff for this story: Rachel Butt in Hong Kong at rbutt4@bloomberg.net; Nerys Avery in Beijing at navery2@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net; Stanley James at sjames8@bloomberg.net

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