China's Manufacturing Hits 3-Year Low

SHANGHAI -- Latest official data from China show a further contraction in manufacturing activity among major companies in November, in another sign of the impact of the global slowdown on the world’s second largest economy. China’s official Purchasing Managers Index (PMI), which measures activity at larger companies, many of them state-owned, fell to its lowest point since August 2012, China’s National Bureau of Statistics said Tuesday.

The figure of 49.6 marked a further fall from October’s 49.8, and the fourth month the PMI index had been in negative territory, state media reported. Any reading below 50 suggests a contraction. Analysts said the figure was worse than expected, suggesting continuing pressure on China’s manufacturers, which have been hit as the country’s exports have fallen in recent months. China's GDP growth dipped below 7 percent in the last quarter for the first time since 2009. And despite more positive PMI figures for China’s service industries, several economists predicted that the Chinese government would have to take further stimulus measures to boost the economy.

Significantly, the latest manufacturing data also suggests that domestic demand, which the government hopes will rise to offset China's export slowdown, may also be declining. The sub-index tracking new orders for China’s manufacturing companies showed that while export demand remained weakest, at 46.4, overall orders, from both home and abroad, also fell back into negative territory in November, down to 49.8 from 50.3 in October.

There was slightly better news, however, from the separate Caixin China PMI, which mainly measures smaller and private companies. It has fallen even lower than the official index in recent months, and remained in negative territory for the ninth straight month, at 48.6, in November. However the figure marked an improvement from October's 48.3, confounding predictions that it would remain unchanged. It was the second monthly improvement in a row.

Caixin Insight Group, which compiles the index, said demand for exports from the surveyed companies -- usually seen as the most flexible sector of China’s economy, but often vulnerable to falls in export demand -- actually grew in November, at the fastest rate in more than a year. And it said factories’ output had stabilized for the first time in six months. However, it also said that domestic demand was weak, with companies still laying off workers -- though at their slowest pace since May.

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He Fan, chief economist of Caixin Insight Group, said the figures suggested that “pressure on economic growth has eased and fiscal policy has had a strong effect,” a reference to the government increasing spending on infrastructure projects in recent months. And he said China’s economy was “on track to become more stable.”

However, He also noted that the prices for both the inputs and outputs of China’s factories fell in November, adding to concern about deflationary pressure on the economy. China’s consumer price index rose just 1.3 percent year-on-year in October, while the producer price index was down 5.9 percent. And Li-gang Liu and Louis Lam, Greater China economists at ANZ Bank in Hong Kong, said in a report that falling prices would hit companies' profits.

They noted that China's industrial profits fell sharply, by 4.6 percent year-on-year in October. And they predicted that the authorities would “further ease monetary policy and continue to implement an expansionary fiscal policy in order to prevent further slowdown of the economy in 2016." Some observers expect further cuts in interest rates and bank's reserve requirement ratio -- which has been cut several times in the past year -- to encourage lending to businesses.

Liu and Lam said there were a few bright spots in China's economy, with profits for high-tech manufacturing and equipment manufacturing up significantly in October. And the official PMI survey also showed signs of continuing improvement in China's non-manufacturing economy, with sectors such as services and construction expanding faster compared to October, at 52.8 and 58.1 respectively. Sectors such as delivery received a particular boost in November from China’s Singles’ Day, the world’s largest online retail festival, while financial services and software continue to grow, according to official reports, and the PMI for new orders in the non-manufacturing sector also continued to rise.

It’s further evidence of what leading economist Zhu Haibin, chief China economist at JPMorgan (N:JPM), recently described as China’s "two-track economy." Speaking at a recent conference of the American Chamber of Commerce in Shanghai, Zhu predicted that China's service sector, which has continued to see double-digit growth this year, would carry on growing healthily, while manufacturing slowed.

China's house prices also rose again in November, up nearly 3 percent year-on-year in 100 major cities, and 7.6 percent in China’s 10 biggest cities, according to a new survey. And some experts continue to predict a possible rebound in GDP growth to about 7 percent in the final quarter of the year.

However, many economists at home and abroad agree that further measures need to be taken if China is to avoid a "hard landing" as its economy slows, and more infrastructure spending is likely to be announced in the coming months -- though the government has suggested it will try to fund some of this by public-private partnerships.