China's Feeling the Pressure to Join Global Easing

China's Manufacturing Sector
“China’s manufacturing sector is still facing de-leveraging pressure,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Deflation in the manufacturing sector continues and the destocking process has not yet completed.” Photographer: Tomohiro Ohsumi/Bloomberg

The case for China to join the latest wave of global monetary easing has increased, with a manufacturing gauge signaling the first contraction in more than two years.

The government’s Purchasing Managers’ Index fell to 49.8 last month from 50.1 in December, missing the median estimate of 50.2 in a Bloomberg survey of analysts and below the 50 level separating expansion and contraction. The slide follows the biggest weekly stock market drop in a year and fiscal data that showed the weakest revenue growth since 1991.

Central banks from the euro zone to Canada and Singapore last month added monetary stimulus as slumping oil prices damp the outlook for inflation and global momentum outside the U.S. moderates. China’s central bank, which cut interest rates in November for the first time in two years, has since added liquidity in targeted measures rather than with follow-up rate reductions or cuts to banks’ required reserve ratios.

“We expect such data will weaken further and push the government to take further easing actions,” said Zhang Zhiwei, chief China economist at Deutsche Bank AG in Hong Kong.

Zhang and Lu Ting of Bank of America Corp. have been among economists who said the People’s Bank of China would delay lowering banks’ RRRs for risk of stoking an equities bubble. The benchmark Shanghai Composite Index fell for a fifth day and was 2 percent lower at 10:17 local time. The yuan weakened.

Raw Materials

Seasonal reasons, falling commodity prices, and weak domestic and international demand caused the decline in manufacturing PMI, Zhao Qinghe, senior statistician at NBS, said in a statement on the bureau’s website.

Most sub-indexes fell, including new orders and new export orders. The sub-index of raw material purchasing prices decreased to 41.9, the lowest in at least a year, on the decline in commodity prices.

“China’s manufacturing sector is still facing de-leveraging pressure,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Deflation in the manufacturing sector continues and the destocking process has not yet completed.”

ANZ Bank economists expect the PBOC will cut banks’ RRR by 50 basis points and lower the deposit rate by 25 basis points in the first quarter. China’s biggest banks must currently set aside 20 percent of deposits, while the benchmark deposit rate is 2.75 percent and the lending rate 5.6 percent.

The non-manufacturing PMI fell to 53.7 in January from the previous month’s 54.1, according to a separate report from the NBS and the CFLP. Services made up 48.2 percent of the economy in 2014, up 1.3 percentage points from a year earlier.

Moderate Deterioration

“There are very few drivers of growth that are doing well,” Louis Kuijs, Royal Bank of Scotland Group Plc’s chief greater China economist in Hong Kong, said in an interview with Bloomberg Television. “There are few engines that can really get the economy going in the first half of the year.”

The final reading of a January PMI from HSBC Holdings Plc and Markit Economics was 49.7, a separate report showed Monday.

The Chinese economy grew 7.4 percent in 2014 and 7.3 percent in the three months ended December. The central bank will be too busy grappling with the slowdown to contemplate widening the yuan’s trading band this year, a Bloomberg survey showed.

“China’s economic downturn will continue in the first quarter and manufacturing activities will stay in a contraction,” Hua Changchun, a China economist at Nomura Holdings Inc. in Hong Kong, said before the PMI release. He was the only economist surveyed by Bloomberg to correctly forecast the January PMI figure.

— With assistance by Xiaoqing Pi

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