China's manufacturing continues to shrink
Manufacturing in China contracted for the 11th month in a row in September, according to a private sector survey of factory managers that indicated the world's second largest economy remains on track for a seventh quarter of slowing growth.
The HSBC Flash China manufacturing purchasing managers' index (PMI) showed activity stabilised in September after hitting a nine-month low in August, with the headline reading ticking up to 47.8 from 47.6 last month.
But while the economy may not have worsened, there were few signs of a fast turnaround. Rather, the PMI, which provides the first glimpse of September's conditions for Chinese industry, pointed to a month in which a slide was halted but not reversed.
September's reading extends the longest period that the PMI has been below 50 - the value that separates contraction from expansion – since HSBC began compiling the survey in 2004.
There was a broad steadying across the sub-indexes in the survey, released today, with the exception of output, which dipped to its lowest level in 10 months.
"China's manufacturing growth is still slowing, but the pace of slowdown is stabilising. Manufacturing activities remain lacklustre, thanks to weak new business flows and a longer than expected destocking process," Qu Hongbin, chief economist for China at HSBC, said in a statement accompanying the survey.
"This is adding more pressure to the labour market and has prompted Beijing to step up easing over the past weeks. The recent easing measures should be working to lead to a modest improvement from Q4 onwards."
China unveiled a series of measures last week to help stabilise export growth, including faster payment of export tax rebates and boosting loans to exporters.
That was on top of a series of approvals for infrastructure projects, two earlier cuts to interest rates, the easing of bank reserve requirements that freed about 1.2 trillion yuan €146.8 billion) for lending and a steady series of liquidity injections into money markets.
Still, purchasing managers in the survey had little cause for premature cheer. A sub-index that measures output fell to 47.0, its lowest level since November 2011.
After spending several months bumping just beneath the crucial 50 mark, the overall PMI index is now at a level rarely seen since the 2008-2009 global financial crisis.
Asian share markets extended losses after the data. Shanghai stocks fell 1.6 per cent to a two-week low, while Australia's big mining stocks - which tend to react to growth expectations in China, their main market - fell more than 1.5 per cent.
Copper futures, which move closely in line with industrial expectations, fell 1 per cent in Asian trade.
The flash, or preliminary, survey offers an early peek at data for September, and suggests economic growth in China is still slack despite what many see as an improvement in the important property sector.
"The good news is it hasn't got any worse, the bad news is it's no better really," said Shane Oliver, head of investment strategy at AMP Capital Investment. "It's telling us Chinese growth is not losing further momentum but recovery remains elusive."
China's home prices showed a modest increase for a second consecutive month in August, rising 0.1 per cent from July, signalling a gentle recovery in the property market. Steel prices hit their highest point in a month yesterday, as signs of a pick-up in demand prompted mills to restock.
Nevertheless, China appears on track for a seventh quarter of slowing growth in the third quarter this year, despite a number of measures designed to encourage private investment and infrastructure construction while avoiding a further pile-up in local government debt.
So far the stimulus measures have not fed through to the broader economy, although inflation began to revive in August, led by higher food prices, after hitting a 30-month low in July.
Many economists lowered their forecasts for the world's second largest economy after weak July and August data, reflecting both external headwinds and domestic weakness. They now expect the third quarter to be the nadir, with full year growth dropping below 8 per cent for the first time since 1999.
"Overall, there is not enough in the latest data to be confident the economy has turned the corner, though momentum does at least appear stable," Capital Economics' China economist Qinwei Wang wrote before the PMI release, referring to a number of indicators his firm tracks.
"The main risk factors are as they were a year ago: the uncertain outlook for property and the ailing global economy."
He noted that the growth rate is steadying on a monthly and quarterly basis, although weakness in property and trade means it is still slowing on an annual basis.
There were some green shoots in September that could support the idea of a late-year rebound.
After several dismal months, HSBC's sub-index tracking new export orders stabilised. Other brighter signs included rises in sub-indexes measuring total new orders, employment and backlogs of work, although both new orders and employment are still below the 50-point that denotes contraction. The tick higher in the new export orders index comes after hitting its lowest point since March 2009 the month before.
Still, the Ministry of Commerce warned yesterday that exports could weaken through the end of the year, with ministry spokesman Shen Danyang calling the outlook grim.
China cut interest rates in June and July and has been injecting cash into money markets to ease credit conditions to support an economy that notched a sixth straight quarter of slower annual growth, at 7.6 per cent, in the April-June period.
Most analysts expect at least one more interest rate and two more cuts in banks' required reserve ratios before the end of the year, to ease conditions and support growth.
But some believe those measures could be held back until after the ruling Communist Party's congress at some point before the end of this year in which a new generation of party leaders will be named. That will give the incoming team a boost by improving the economy and the national confidence, they argue.