Mainland factory sector growth hits 3-month low
Bigger-than-expected drop in HSBC China PMI points to need for more relaxed state policies
The mainland's factory sector expanded at its slowest pace in three months as new orders and production moderated, a private survey showed, increasing the pressure for more policy easing given the slowdown in the economy.
The HSBC flash China manufacturing purchasing managers' index fell to 50.3 from 51.7 last month, trailing economists' average forecast of 51.5.
The data "suggests the economic recovery is still continuing but its momentum has slowed again", said Qu Hongbin, the chief economist for China at HSBC.
"We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity."
Almost all the PMI sub-indices declined, with output dropping to a three-month low of 51.3 from 52.8 and new orders sliding to 51.3 from 53.3. Export orders also declined, albeit less drastically.
"Given the HSBC PMI tends to lag [month on month industrial production] slightly, it may be a reflection of weaker growth momentum in July amid tighter monetary conditions and less aggressive policy measures," Goldman Sachs economist Song Yu said.
Earlier this month, official data showed total social financing, the broadest gauge for credit, fell last month to the lowest since November 2008. Industrial production growth decelerated while real estate investment rose at the slowest rate in nearly five years.
Analysts said the latest survey underscored the pains that small and medium-sized enterprises had suffered from weak demand and tight credit, given the HSBC PMI's greater sample focus on smaller businesses compared with the official PMI gauge to be released by the National Bureau of Statistics on September 1.
But such a situation might be temporary and seasonal, analysts said, with most seeing a rebound in industrial activity this month as credit conditions normalised.
Still, economists are split over how aggressive Beijing's easing policy may turn in the rest of the year as the leadership has vowed to defend the annual economic growth target set at about 7.5 per cent.
The economy expanded 7.4 per cent in the first half, thanks to the government's mini-stimulus policy, including reserve requirement ratio cuts for banks, reduced taxes for selected small firms, and acceleration in infrastructure projects.
In the latest efforts to reinvigorate the economy, the State Council said it would cut tax rates for qualified high-technology companies to as low as 15 per cent. That compares to the 25 per cent rate for most companies on the mainland, although the favourable treatment may affect a limited number of enterprises.
Citigroup said it might take a sharper downturn, such as PMI falling below 50, for the government to intensify its policy easing, including adopting broad-based reserve ratio and interest rate cuts. Barclays Capital said two interest rate cuts in the second half would help the economy expand 7.4 per cent for the year.