Manufacturing under lingering pressure

A worker installs rotor coil at a CITIC Heavy Industries Co Ltd plant in Luoyang, Henan province. The HSBC Purchasing Managers'Index slipped to 48 in March from 48.5 in February. Huang Zhengwei / For China Daily

Industry reports lowest March PMI in 9 years, driven by a weak rise in demand demand, latest figures reveal

China's manufacturing sector is still suffering from weak demand, according to the latest Purchasing Managers' Index for March, adding to signs that the world's second-largest economy slowed in the first quarter.

Analysts said policymakers need to work out more measures to stabilize growth, given the fact that many economic figures released so far this year - including industrial production, fixed-asset investment and housing sales for the first two months - were all weaker than forecast.

The manufacturing PMI in March climbed to 50.3 from 50.2 in February, marking the first increase since November, supported by a slight improvement in output, new orders and finished goods inventory, according to data released on Tuesday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing. It was the lowest March figure for nine years.

The PMI figure for large enterprises increased to 51, compared with 50.7 in February and that for the medium-sized enterprises eased slightly to 49.2 from 49.4, while that for small companies rose for the second consecutive month to 49.3 - the highest level since July.

If the reading is above 50, it indicates expansion.

"The worst time this year for the Chinese economy may have passed," said Liu Ligang, chief economist in China at ANZ Banking Group Ltd. An expected acceleration of investment projects and the current relatively loose monetary policy will improve the country's economic indicators in the coming months, he said.

"How fast the rebound is will depend on whether the central bank can cut financing costs or the loan interest rate for enterprises," Liu added.

The benchmark stock index - Shanghai Composite Index - was 0.7 percent, 14.15 points, higher at Tuesday's close. The Hong Kong Hang Seng Index jumped 1.34 percent.

Despite the 0.1 point improvement in the latest PMI data, it was the lowest figure for March since 2005. "It is under-performing the normal seasonal pattern rather notably, suggesting that the underlying momentum in the manufacturing sector likely remains on the soft side," said Zhu Haibin, chief economist in China at JPMorgan Chase & Co.

The weak number reflects the effect of the credit-tapering process starting in the second half of 2013, lingering overcapacity problems in a number of industrial sectors, the near-term effects of the anti-corruption campaign on public consumption and public investment as well as slowing household income growth, according to Zhu.

The official rise went against the HSBC Holding Plc's manufacturing PMI, which sampled small and medium-sized enterprises.

On Tuesday, the HSBC PMI showed a more pessimistic picture in March. The figure slipped to 48 from 48.5 in February, indicating that business conditions in the manufacturing sector deteriorated for the third consecutive month.

This deterioration was the strongest since July 2013, with sharp declines in output and new orders. It reflected the fact businesses have started to cut workforce numbers and purchasing activity amid a gloomy outlook, according to the HSBC report.

"The difference between HSBC's and the official PMI could be attributed to the fact that the HSBC PMI covers mainly small enterprises which are suffering more in the current slowdown," said Lu Ting, chief China economist with Bank of America Merrill Lynch.

One factor behind the slowdown is the government's anti-pollution campaign, which has shut down numerous small steel and cement mills, he said, adding that rising labor costs also squeezed many small businesses.

Qu Hongbin, chief economist in China and the joint head of Asian economic research at HSBC, said the figure confirmed the weakness of domestic demand conditions. "This implies that the first quarter GDP growth is likely to have fallen below the annual growth target of 7.5 percent."

It may lead to a fine-tuning policy soon to stabilize growth, he said.

Premier Li Keqiang said last week when he visited Northeast China's Liaoning province that the government has policies ready to counter any volatility this year, as well as the capability to maintain growth within a "reasonable range", - that is, a GDP growth rate around 7.5 percent this year.

A report from the Bank of Communications Co Ltd lowered its first quarter GDP prediction to 7.3 percent from 7.6 percent, as both domestic and external demand shrank quickly against the last three months of 2013.

Poor export figures, slowing fixed-asset investment and weak industrial production will add to pressure on the economy, said Lian Ping, chief economist at the bank. "If there is no fine-tuning policy to support growth in the short term, it is uncertain we will see a rebound in the second quarter."

He said that in March the year-on-year growth rate of industrial output may have accelerated to 9 percent from 8.6 percent during January and February, adding fixed-asset investment was likely to have increased by 18.5 percent from January to March, compared with 17.9 percent in the first two months of the year.