China’s Manufacturing Continued to Decline in February

The manufacturing outlook in China looks grim, as the sector continued to contract in February. Two recent surveys of factory activity in the country show a deterioration in manufacturing, a consistent sign that the world’s second-largest economy is slowing. The release of the downbeat data comes just one day after the central bank cut its reserve ratio requirement.

An index of factory activity in China declined in February to 49, down from 49.4 in January and marking the seventh consecutive month of contraction. The reading was the lowest in seven years when it fell to 45.3 in 2009 during the global financial crisis.

The data, released by the China Federation of Logistics and Purchasing, is based on a simple 100-point scale under which a reading below 50 indicates contraction.

A separate private survey indicated further contraction in China’s manufacturing sector. The Caixin/Markit PMI (purchasing managers’ index) dropped to 48 last month, a 5-month low, from 48.4 in January.

The Caixin survey covers primarily private, small companies, while the federation’s report focuses on large companies owned by the state.

The news comes at a time when China’s government is facing increased pressure to implement further stimulus policies to spur growth and prevent the economy from slowing too sharply. On Monday evening, the People’s Bank of China cut the RRR (reserve ratio requirement) to free up more lending money.

Economists do caution that the manufacturing numbers were slightly distorted due to the Lunar Holiday earlier in the month. Typically, factories ramp up production just ahead of the holiday before shutting down for an extended break in early February.

China’s services sector offered some positive news. A survey on non-manufacturing business activity came in at 52.7, down from January’s reading of 53.5., which still indicates that the sector is growing. The services sector has helped offset the major decline in manufacturing, which saw its slowest growth in 25-years last year.

The economic slowdown in China comes at a time when Beijing policymakers are attempting to make the shift from a manufacturing and investment growth model to a consumption and services model. To help spur growth and ease the transition, China’s central bank reduced the amount of capital lenders are required to keep on deposit at the People’s Bank of China.

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Daniel Simmons