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China Factory Activity Slows, Stoking Market Fears
China Factory Activity Slows - WSJ.comBy AARON BACK
BEIJINGFears are resurfacing over the potential for a sharp slowdown in China, the world's second-largest economy, even as the outlook for the U.S. and Europe has brightened.
Data in recent weeks has painted an increasingly gloomy picture of slowing manufacturing, weak exports and tepid bank lending in China. The latest indicator to spook markets came Thursday with the flash HSBC Purchasing Managers' Index, an initial reading on manufacturing activity in March. The PMI fell to a preliminary reading of 48.1, down from 49.6 in February.
The March PMI reading marks the fifth straight month the index has indicated contraction, signaling extended difficulties for the nation's manufacturers. A reading below 50 indicates contraction from the previous month, while anything above that indicates growth.
Nonetheless, economists say that a "hard landing" scenario for China remains unlikely, because Beijing would likely respond to an economic soft patch with further measures to loosen monetary policy and boost the economy.
Employees work along a production line in Suzhou Etron Electronics Co. Ltd's factory in Suzhou, Jiangsu province. China's manufacturing sector activity shrank in March for a fifth successive month, with the overall rate of contraction accelerating and new orders sinking to a four-month low, the HSBC flash purchasing managers index showed on March 22.
Ever since the financial crisis in 2008, China has been a bright spot for the global economy and a crucial support for growth around the world. But now that picture is starting to change, with concerns over China coming into focus just as U.S. economic data are starting to signal a strengthening recovery and European sovereign-debt fears are fading.
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While the recent modest improvement in the U.S. economy will help support global growth, it won't be enough to make up for the recent drop-off in the pace of China's activity, said Selena Ling, head of research and strategy at OCBC Bank in Singapore.
European stock markets fell on Chinese data showing its economy slowing faster than expected and the gloom was reinforced by euro-zone business activity data indicating a contraction in March. Dow Jones's Martin Essex goes in search of growth. Photo: Getty Images
"Everyone was looking to China to be the savior in a sense, given tepid U.S. growth and recession in Europe. Hopes on that front are fading a little bit," she said.
Foreign-exchange markets reacted sharply to the weak reading. The Australian dollar, which is highly sensitive to Chinese growth and demand for raw material imports, fell to 1.0378 against the U.S. dollar from 1.0474 just before the report. The Korean won, the Singapore dollar and other currencies all fell against the U.S. dollar.
The stock market reaction was more muted but also negative. The Shanghai Composite closed down 0.1% after initially falling 0.4%. Commodities like copper and oil also fell in international trading.
Sub-index readings within the PMI suggested that weak domestic demand is the main culprit for the slowdown.
The new orders sub-index fell to a four-month low of 46.1, from 48.5 in February. Meanwhile, the new export orders sub-index rose to 48.7 from 47.5 in February but remained below the expansionary threshold of 50.
A revised final reading, based on more complete survey results, is due out at the end of March or early April, though HSBC hasn't set a precise date yet.
"The steeper drop in overall new orders than in new exports-only orders suggests China's slowdown remains more internally than externally driven," HSBC economists said in a note.
"Chinese authorities are under pressure to loosen policy," said Nomura economist Zhiwei Zhang. The PMI reading, he said, is only the latest weak indicator out of China, coming on top of disappointing trade and bank lending data in the first two months of the year.
On Thursday, a leading Chinese financial newspaper, the China Securities Journal, urged the country's central bank to cut interest rates in the second quarter at the latest, in order to reverse the economy's slowing trend within this year.
Focus will now shift to China's gross domestic product data for the first quarter, along with other indicators such as March industrial production, all due on April 13. If the data are weak, an interest rate cut may be on the table, Mr. Zhang said.
China's central bank has so far shied away from cutting interest rates, possibly for fear that such a move could put new air into a housing bubble that authorities have been trying to gradually deflate.
Instead, the People's Bank of China has cut the level of reserves that bank must hold twice since November. That frees up additional funds for lending but has less potent economy-wide effects than a change in interest rates.
Other levers at Beijing's disposal include the option to increase fiscal spending on social benefits and infrastructure projects or to slow the appreciation of the yuan, giving exporters a break.
Indeed, so far this year the yuan is essentially flat against the U.S. dollar, having risen 4.7% last year.
Top officials at China's central bank have hinted in recent weeks that they may soon move to widen the daily range within which the yuan is allowed to trade on any given day, which would give the currency more leeway to move up or down.
Martin Vaughan in Singapore contributed to this article.
