China’s manufacturing activity contracted for the second straight month in February, the government said Sunday, a day after the central bank announced an interest rate cut to help stem a slump in the world’s second-largest economy.
The official Purchasing Managers’ Index (PMI) released by the National Bureau of Statistics (NBS) came in at 49.9 last month, up a fraction from 49.8 in January, but remaining in contraction.
The index, which tracks activity in factories and workshops, is considered a key indicator of the health of China’s economy, a major driver of global growth. A figure above 50 signals expansion, while anything below indicates shrinkage.
January’s figure had been the first contraction for 27 months and highlighted weakness in the key sector as China’s economic growth slows. “The manufacturing PMI figure released today reinforces that headwinds remain in the economy,” ANZ economists Liu Li-Gang and Zhou Hao wrote in a reaction to the survey.
China’s overall economy expanded 7.4 percent in 2014, a 24-year low, with the slowdown prompting authorities to loosen monetary policy in a bid to put a floor under growth. Underscoring concern, the People’s Bank of China (PBoC) announced on Saturday that it was lowering benchmark interest rates for the second time in three months. The central bank lowered its one-year rate for deposits by 25 basis points, or 0.25 percentage point, to 2.5 percent and its one-year lending rate by a similar margin to 5.35 percent. The move takes effect on Sunday.
- ‘Historically low inflation’ -
In a statement posted on its website, the bank pointed to “historically low inflation” as among the factors behind the move.
Chinese inflation as measured by the consumer price index (CPI) plunged to a more than five-year low of 0.8 percent in January, fuelling fears the economy could be on the brink of deflation.
The producer price index, a measure of costs for goods at the factory gate and a leading indicator of the trend for CPI, declined for the 35th straight month in January, recording its biggest decline since October 2009.
The PBoC surprised markets on November 21 by cutting interest rates for the first time in more than 2 1/2 years.
“We believe that China has started a new round of policy easing, and more easing policies can be expected,” Liu and Zhou of ANZ wrote. They expect the PBoC to carry out another 25-basis point cut in deposit rates this year as well as further slash the reserve requirement ratio (RRR), the percentage of funds banks must hold in reserve. The central bank in early February announced its first across-the-board cut in the RRR in more than 2 1/2 years in a bid to spur lending and boost the economy. Sunday’s data from the NBS come after British bank HSBC said last week that its PMI survey returned to expansion territory.
The preliminary reading for February came in at a four-month high of 50.1, up from 49.7 in January, said HSBC, which is scheduled to release its final figure on Monday. China’s leaders are trying to pull off a managed slowdown in the Asian giant in which consumer spending becomes the main driver of growth — as in other major economies such as the United States and Japan.
Saturday’s rate cut announcement came as China prepares to open the annual meeting of its rubber-stamp legislature during which Premier Li Keqiang is expected to give an annual speech on the state of the economy, including the closely watched official growth objective for this year. “We believe that China will lower the growth target to 7.0 percent this year in the upcoming National People’s Congress, down from 7.5 percent last year,” Liu and Zhou wrote.
