China factory activity shrinks, survey states

Dec 31, 2014, 12:38 AM EST
Chinese workers paint unfinished licensed ceramic 'Smurfs' at the Shunmei Group (SMG) ceramics factory during a tour on December 7, 2014 in Dehua,Fujian Province, China.
AFP/Getty Images

China's manufacturing activity shrank for the first time in seven months in December, a private survey showed on Wednesday. The BBC reports:

The final HSBC/Markit Purchasing Managers' Index (PMI) was at 49.6, just below the 50 level that separates growth from contraction in the sector. The reading was slightly higher than an initial "flash" number of 49.5 released earlier this month.

But, the result was still down from a final reading of 50 in November. The most recent data paints an even weaker picture of the slowing Chinese economy, which has been heralded as the "factory of the world".

New factory orders contracted for the first time since April.

The economic data also backs the series of surprising moves by its government to boost growth in the past two months.

In November, the country's central bank unexpectedly cut interest rates to 2.75% for first time since 2012 in an attempt to revive the economy. Whether the world's second biggest economy will be able to reach its growth target of 7.5% after not missing the mark for 15 years has economists questioning if more needs to be done by policymakers.

While the downbeat data is not a surprise considering the preliminary reading released earlier this month, Ryan Huang, market strategist at broker IG Asia said it just adds more pressure on Beijing to introduce more measures.

"There's still bit of way to go before we see the Chinese economy reviving," he told the BBC. "They [the central bank] have been doing [banks'] reserve requirement ratio cuts, loan to deposit ratios have been lowered to help lending conditions - we'll probably see more of this happening."

Mired in industrial overcapacity, factory-gate deflation and a housing slump, China is headed for its slowest full-year economic expansion since 1990. Bloomberg News reports:

The central bank, which cut its benchmark interest rate in November, has expanded its toolkit to support growth, freeing up more funds for lenders in 2015 by broadening the definition of a deposit and adding liquidity by stealth at least four times in the past four months.

The HSBC and Markit PMI is typically based on responses to surveys sent to purchasing managers at more than 420 companies.

A separate manufacturing PMI will be released tomorrow by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing.

That index, which has been based on responses to surveys sent to purchasing executives at 3,000 companies, probably dropped to 50 in December from 50.3 the previous month, according to a Bloomberg survey.