China's Manufacturing PMI Weakens to Lowest in Three Years

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China Manufacturing Tumbles to Three-Year Low
  • Manufacturing PMI Weakens to 49.6; non-manufacturing at 53.6
  • Readings show two-speed pace of growth as services outperform

China’s manufacturing conditions slipped to the weakest level in more than three years as sluggishness in the nation’s old growth drivers add to risks facing the government’s growth target.

QuickTake China’s Pain Points

The official purchasing managers index fell to 49.6 in November, the National Bureau of Statistics said Tuesday -- the lowest level since August 2012. That compared with a median estimate of 49.8 in a Bloomberg survey of economists, which was also the level for September and October. The non-manufacturing PMI rose to 53.6 from 53.1 a month earlier. Numbers below 50 indicate deterioration.

Six central bank interest-rate cuts since November last year haven’t been enough to spur a recovery in manufacturing, which has continued to weaken while activity in the services sector has shown more strength. Premier Li Keqiang’s goal of about 7 percent expansion for 2015 is at risk, even as employment has held up thanks to resilience the in services and consumption.

"The data show further divergence in manufacturing and non-manufacturing sectors," said Zhu Qibing, a Beijing-based analyst at China Minzu Securities Co. "Considering further cuts in overcapacity, the divergence will continue into at least mid-2016."

The Shanghai Composite Index pared earlier losses and was 0.4 percent higher at 1:43 p.m. local time. The yuan -- which won approval Monday for addition to the IMF’s list of reserve currencies -- weakened in offshore trade.

Another manufacturing PMI released by Caixin Media and Markit Economics edged up to 48.6 in November, exceeding the median estimate of 48.3. The gauge has a smaller sample size and includes smaller companies and exporters.

Readings of output, new orders, inventories and employment all weakened from October, the official manufacturing PMI report showed. Input prices for raw materials slumped to the lowest point this year, according to an NBS statement.

"Deflationary pressures are rising," said Qu Hongbin, chief China economist and co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "Since entrenched deflation would exacerbate the debt problem and risk a downward spiral, now is the high time for Beijing to act in a more decisive and co-ordinated manner to lift confidence and end deflation. "

A range of private indicators for November had suggested conditions remained weak for China’s industrial sector. A privately compiled PMI and a gauge based on search engine interest in small and medium-sized businesses deteriorated last month, while a sentiment indicator dropped sharply from October.

A PMI reading for the steel industry slumped to 37 in November.

"The steel sector in China continues to come under overcapacity pressures as well as declining demand on the back of slumping property investment," according to a recent report by Liu Li-Gang, head of China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong.

To combat the downturn, the People’s Bank of China has cut benchmark borrowing costs to a record low and is adding funds to the banking system as it moves to a new monetary framework.

"Substantial policy support has yet to make the economy any better, though it has at least stopped it from getting worse," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. "Policy will remain supportive, including further rate cuts in 2016 and amped up fiscal spending. Accelerated easing is not yet called for."

China's 'Old Manufacturing' Suffering: IHS's Jackson

— With assistance by Xiaoqing Pi

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