China Factory Slowdown Underscores Li’s Growth Challenges

China Manufacturing
A laborer assembles an industrial washing machine at the Guangzhou Lijing Washing Machine Co. factory in Guangzhou, China, on Nov. 27, 2013. Photographer: Brent Lewin/Bloomberg

Two Chinese manufacturing indexes fell last month, adding to challenges for growth as Premier Li Keqiang maps out the government’s strategy to the nation’s legislature this week in Beijing.

The purchasing managers’ index from HSBC Holdings Plc and Markit Economics dropped to a seven-month low of 48.5, the companies said today. A similar gauge from the government with a larger sample size fell to 50.2, the lowest since June, a report showed March 1. Numbers above 50 signal expansion.

The data underscore the challenges in the world’s second-largest economy as officials try to sustain expansion above Li’s 7 percent bottom line while reining in credit, boosting jobs and curbing social unrest. 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.”

A separate gauge of service industries from a government survey of purchasing managers rebounded in February to 55.0 from a five-year low, a report showed today.

China’s benchmark Shanghai Composite Index of stocks 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. The gauge was up 0.5 percent at 10:33 a.m. local time.

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 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 after the data release.

‘Pro-Growth Policies’

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.

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 March 1 report. “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.

Government Gauge

The government’s PMI, released by the National Bureau of Statistics and China Federation of Logistics and Purchasing, compared with January’s 50.5 reading and the 50.1 median analyst estimate in a Bloomberg News survey. It’s based on responses to questionnaires sent to purchasing executives of 3,000 companies.

In the 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 gauge from HSBC and Markit.

HSBC’s PMI, which is weighted more toward smaller companies, fell from January’s final reading of 49.5 and compared with a preliminary 48.3 released on Feb. 20. It was the second straight below-50 reading.

Australian Steel

BlueScope Steel Ltd. Australia’s biggest steelmaker with 32 offices in China, said demand for industrial buildings and construction products is slumping in China. 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.

— With assistance by Rachel Butt, and Nerys Avery

(Corrects fifth paragraph to say services gauge rebounded from five-year low, not record low.)
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