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3-min read

China industrial activity shrinks in December, calls grow for more stimulus

The economy is expected to grow 7.4 per cent this year, its slowest pace in nearly a quarter of a century.

Reuters

Updated:December 16, 2014, 2:55 PM IST
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China industrial activity shrinks in December, calls grow for more stimulus
The economy is expected to grow 7.4 per cent this year, its slowest pace in nearly a quarter of a century.
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Beijing: Activity in China's factory sector contracted in December for the first time in seven months, the latest in a string of weak economic indicators that will intensify calls for more stimulus measures to head off a hard landing.

The flash HSBC/Markit manufacturing purchasing managers' index(PMI) fell to 49.5 in December from November's final reading of 50.0 and below the 50.0 forecast by analysts.

The new orders sub-index fell to 49.6, the first contraction since April. A reading below 50 indicates contraction, while one above 50 points to expansion on a monthly basis.

"The manufacturing slowdown continues in December and points to a weak ending for 2014," Hongbin Qu, chief economist for China at HSBC, said after the survey was released on Tuesday.

"The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months."

However, while economists have continued to call for more easing, others question whether another round of easy credit is what China needs, given the country is still struggling to work off a mountain of bad debt and manufacturing overcapacity engendered by the last round of policy easing in 2009.

"We expect policymakers to respond to the continued weakness with further rate cuts and liquidity injections," wrote Julian Evans-Pritchard at Capital Economics in Singapore.

"That said, we think that those expecting a policy-driven rebound in growth next year will be disappointed."

Economists have noted that a surprise interest rate cut by the central bank on November 21 has yet to result in lower financing costs, although the cut, combined with a quiet relaxation of loan restrictions beginning in October, did appear to have translated into a surge in loans in November.

Two-speed economy?

While manufacturing has been weak, weighed down by a cooling property market, tight credit conditions and erratic exports, China's services sector has proved more resilient.

Other data released on Tuesday showed cumulative foreign direct investment posted a mild recovery in November after four straight months of decline, with investment in services growing even as investment in manufacturing declined.

The transition to services is a key policy goal, which would help restructure China's economy toward a more labor-intensive and less investment-intensive model that is seen as more sustainable and more in line with other advanced economies.

But for the same reason, service industries are less responsive to credit easing than manufacturers; firms don't hire more lawyers or programmers just because interest rates are low.

Thus some economists question whether the China's deepening economic malaise, in which weak customer demand is seen as playing a major role, will respond to a liquidity injection, or whether the cash will simply flow into low-yielding infrastructure projects, speculative ventures in real estate or into a stock market that has rallied heavily on borrowed money.

Revising targets

China's top leaders said last week that they will try to sustain reasonable growth in 2015 even though the economy faces "relatively big downward pressure".

They are preparing to revise their estimate of 2013 gross domestic product (GDP) growth after adjusting the way the figure is measured.

The head of the National Bureau of Statistics said on Tuesday that the new methodology would revise up the size of the economy in 2013 by around 3 percent, without giving details. The new number will be published on Dec. 19.

However, the rise in historical measurement is not seen as providing a basis for more optimism about present conditions.

"I don't think they will change the main assessment of the current economic situation," said Zhu Haibin, chief China economist at JPMorgan in Hong Kong. "If they revise up, that means growth in the past several years will also be higher and the slowdown trend is still there."

The economy is expected to grow 7.4 per cent this year, its slowest pace in nearly a quarter of a century, and cool further to 7.1 per cent in 2015, according to a Reuters poll.

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