China factory sector shrinks most in nine months

Reuters: China’s factories contracted in August the most in nine months according to a survey showing falling export orders and rising inventories, signs that more policy action is probably needed to stop a slowdown in economic growth now in a seventh quarter.

The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 in August, its lowest level since November, down from both the 49.5 July flash and the 49.3 final reading.

After hovering for several months just under the 50 mark that divides expansion from contraction, the index is now at levels rarely seen since the 2008-2009 global financial crisis.

“Inventory numbers are the highest on record. Orders to inventory are the lowest since December 2008. Foreign orders to inventory are the lowest since January 2009. It’s very hard to put a positive spin on anything within the data,” Robert Rennie, chief currency strategist at Westpac Bank, told Reuters.

“Bottom line - a very poor update with some very poor China data to come,” he said.

The risk of slower Chinese growth denting demand for Australian exports knocked a quarter of a US cent from the value of the Aussie dollar and depleted enthusiasm for regional equities, which gave up some of gains.

The survey provides an early peek at data for August, as well as an indication that a pick-up in economic growth may not have taken root as anticipated.

A fall in the new export orders sub-index to 44.7 – the lowest level since March 2009 – provides particularly bearish reading.

“To achieve the stated policy goal of stabilising growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months,” Qu Hongbin, chief China economist at HSBC in Hong Kong said in a statement accompanying the index.

A sharp drop in China’s official producer price index in July, which marked the fifth straight month of producer price deflation, was also reflected in the HSBC survey. It showed a sub-index measuring factory input prices at its lowest level since March 2009.

The flash PMI also showed inventories piling up.

“Weaker-than-expected sales contributed to a further rise in holdings of finished goods at manufacturers’ plants,” Markit Economics, which conducted the survey, wrote in a note.

The HSBC PMI has been below 50 for 10 straight months, reinforcing calls from analysts and investors for further measures from Beijing to support economic growth.

China is loathe to unleash a massive stimulus package as it did in 2008. Instead, it has chosen to open more sectors to private capital to help fund new investment projects.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, was cautious about declaring that Beijing’s efforts to boost infrastructure investment and fast track fiscal spending plans had failed to gain traction.

“The effect of policy stimulus through infrastructure investment may not show up as strongly in the HSBC PMI as in the official PMI as the former focuses more on private companies,” Zhang wrote in a note to clients, adding that China’s official PMI - due on September 1 - will be the best guide to whether economic momentum is slowing and requiring a bigger response.

The flash PMI is based on 85-90 percent of total PMI survey responses, set to be published in full on 3 September.

HSBC’s flash employment sub-index was unchanged from June, when it had registered its lowest level since March 2009, the point at which China began to pull out of the trough of the global financial crisis.

Falling demand from debt-ridden Europe – China’s single biggest export market – has put the Chinese economy under pressure.

Data from elsewhere in Asia shows the risk that Europe’s problems could be spilling out regionally courtesy of China’s exposure to a downturn in its biggest foreign market.