Update | China factory activity slumps to lowest since 2012
Beijing’s supply-side economic reforms have yet to translate into immediate relief for manufacturers
China’s factory activity fell to its lowest point in more than three years, as Beijing pushes ahead with supply-side reforms to address underlying problems in manufacturing.
The official manufacturing purchasing managers’ index (PMI) fell to 49.4 in January, its weakest since August 2012, the National Bureau of Statistics said on Monday. It marked the sixth straight month the reading was below 50 – the level that indicates contraction in the sector.
New orders, new export orders and inventory – key sub-indices of economic resilience – all dropped last month, pointing to lingering fragile demand at home and overseas.
The official services PMI fell to a three-month low of 53.5 in January, indicating services continued to expand but at a slower pace.
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Sharp market volatility and an unclear outlook on the yuan’s exchange rate had pressed manufacturers to be more cautious in restocking, said a leading broker at China International Capital Corporation.
Expectations of currency depreciation reflected a worsening of economic fundamentals, the firm added.
Beijing’s supply-side policies should benefit manufacturers in the long run, but the push is unable to address the slowdown in growth in the short term. Given the increased downward pressure, calls for demand-side stimulus policies have been growing.
“Supply-side reforms can only be carried out under stable economic conditions,” CICC said. “Therefore, the current focus on macro policies should be placed on the demand side, which will be helpful to reduce investment risk premium and ease pressure of capital outflow.”
Beijing has limited room to boost growth through monetary policy. The central bank’s priority, at least for now, is to ensure a stable yuan. The People’s Bank of China is reluctant to tinker with cuts to the reserve ratio, fearing that could increase deprecation pressure on the yuan and exacerbate capital outflow.
The PBOC has chosen to inject additional short-term funds via weekly routine liquidity operations with banks, but economists wonder when the money will finally reach businesses given a general reluctance to lend. Furthermore, the possibility the US Federal Reserve might raise interest rates could also restrict room for interest rate cuts by the Chinese central bank.
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The PBOC should cut the interest rate to lower corporate financial costs, said Liu Dongliang, an economist with China Merchants Bank. A cut in the reserve ratio was a matter of time, Liu said, adding a flexible exchange rate was needed given weak external demand.
Given the restraints on monetary policy, fiscal manoeuvres are expected to play a bigger role, although
Beijing must contend with slowdown in income.
Data showed fiscal expenditure rose only 0.75 per cent in December against a year ago. The National People’s Congress is expected to approve a larger fiscal deficit for 2016 in early March. Tax breaks and cuts are also expected, but such a move would further cloud fiscal income.
Liu said the government needed to send a clear message that it would continue to push loosening polices to lift market sentiment and cement confidence in businesses.
