China's factories lose more momentum

HONG KONG - China's manufacturing sector continues to gear down, highlighting the country's slowing economic growth.

China's manufacturing outlook deteriorated in February, according to two surveys of factory activity released Tuesday, a day after Beijing loosened credit to counter sluggish conditions in the world's second biggest economy.

An index based on an official survey of factory purchasing managers declined to 49.0 in February from 49.4 in January in the seventh straight month of contraction. The index has not been at a lower level in seven years; it fell to 45.3 in Jan. 2009 as the global financial crisis was unfolding.

"The economy's road to stability remains bumpy," said He Fan, Caijing magazine's chief economist, said of the manufacturing report Tuesday. "The government needs to press ahead with reforms, while adopting moderate stimulus policies and strengthening support of the economy in other ways to prevent it from falling off a cliff."

The reading by the China Federation of Logistics and Purchasing is based on a 100-point scale with the 50 mark dividing expansion from contraction.

Separately, a private survey also showed further weakening in manufacturing.

The Caixin/Markit purchasing managers' index slipped to a five-month low of 48.0 last month from 48.4 the previous month.

"The index readings for all key categories including output, new orders and employment signaled that conditions worsened, in line with signs that the economy's road to stability remains bumpy," said He Fan, chief economist at Caixin Insight Group. He said the government faces more pressure to continue rolling out "moderate" stimulus policies to prevent growth from slowing too sharply.

The latest such move came Monday night when the central bank freed up more money for lending by cutting the amount banks need to hold in reserve.

Caixin's survey mostly covers smaller, private enterprises while the federation report focuses on larger, state-owned companies.

Economists cautioned the numbers were distorted by the Lunar New Year holiday, which falls at different times in the first two months of the year. Factories typically stock up on raw materials and scramble to fill orders before shutting for an extended break that began this year in early February.

Attempting to iron out the distortions, ANZ Bank economists Raymond Yeung and Louis Lam noted that the official index's average for January and February together was 49.2, which still indicates contraction.

There was some better news for China's services sector, with an official survey of non-manufacturing business activity slipping but continuing to grow last month, coming in at 52.7 from 53.5 in January. Services have helped offset manufacturing weakness in China's economy, which last year posted its slowest expansion in a quarter century as growth ebbed to 6.9 percent.

China's economic slowdown comes as policymakers in Beijing try to wean the economy off a tired model based on manufacturing and investment and refocus it on self-sustaining services and domestic consumption. To spur lending, the government on Monday moved to cut how much capital China's lenders must keep on deposit at the country's central bank.

The change reduced required reserves by 0.5 percent points effective Tuesday, which will release several hundred billion yuan (tens of billions of dollars) into the market. Chinese trading is heavily influenced by the availability of credit, so an easing can lead to higher prices.

"With respect to the manufacturing side of the Chinese economy, the government is getting serious about slashing excess capacity in a variety of industries," said Peter Boockvar, chief market analyst with the Lindsey Group, in a note.

Some forecasters expect China's efforts to loosen monetary conditions to succeed in shoring up growth.

"Given the usual impact of such easing on investment, we don't think growth is set to weaken much further this year as many expect," said Julian Evans-Pritchard, China economist with Capital Economics, in a report. "If anything, we still think a small policy driven uptick in growth is the most likely scenario."

But questions remain about whether China can avoid a "hard landing" given the massive overcapacity in its industrial base, with many state-run factories around the country sitting idle. Without sufficient domestic demand to fill the vacuum, the government is reportedly planning to lay off 1.8 million coal and steel workers, and perhaps millions more over the next few years.