Beijing's easing policy tested as factory output slows

Mainland economic growth in the next few months may test Beijing's commitment to its targeted easing policy, which has so far proved ineffective in spurring real demand, with a private survey pointing to fresh softness in the factory sector.

The HSBC flash China manufacturing purchasing managers' index fell to 50 this month, on the cusp of contraction and a six-month low, from 50.4 last month. The output index slumped to 49.5, the lowest in seven months, survey results released yesterday showed.

The State Council rolled out a raft of fresh measures on Wednesday aimed at easing companies' funding bottlenecks. Such government pledges have been heard many times this year, analysts say, but high borrowing costs remained a key problem that is hurting real demand.

The cabinet said it would, as part of the measures, adopt "more flexible" loan-deposit ratio management, which is likely to give banks more room to extend loans. It also reiterated the aim to expand loans to smaller firms and the rural sector.

However, Citigroup said such steps might not help cut funding costs for those most in need.

"Targeted measures employed so far focused only on the supply side but not weak credit demand, and were thus ineffective," said Citigroup economist Shen Minggao.

Shen expects the People's Bank of China to cut policy rates by 75 basis points by the middle of next year to boost demand.