China's HSBC flash PMI continues steady fall, March figures drop to 8-month low

Beijing: Activity in China’s factories slowed for a fifth straight month in March, a preliminary private survey showed on Monday, raising market expectations of government stimulus to arrest a loss of momentum in the world’s second-largest economy this year.

Concern about the health of the Chinese economy knocked the country’s main share index and other Asian markets lower, and lopped around a quarter of a U.S. cent from the Australian dollar, which is often used as a liquid proxy for Chinese risk.

The flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to an eight-month low of 48.1 in March from February’s final reading of 48.5. The index has been below the 50 level since January, indicating a contraction in the sector this year.

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Output and new orders both weakened but new export orders grew for the first time in four months, the survey showed, suggesting the slowdown has been driven primarily by weak domestic demand.

“Usually, for the month of March, the PMI will rebound, because after Chinese New Year, there should be some activity coming back, but this PMI is disappointing,” said Wei Yao, China economist at Societe Generale in Hong Kong. “The government probably will have to provide some supporting measures.”

“I think the slowdown is not over yet and our expectation is that the deceleration will continue into Q2,” she added.

The CSI300 index of the leading Shanghai and Shenzhen A-share listings shed all its early gains after the data, while Hong Kong shares pared gains of more than 1.5 percent to be 0.9 percent higher.

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The preliminary Markit/HSBC March index showed new orders slid for a fourth consecutive month, to 46.9, the lowest since July 2013, while output fell to an 18-month low of 47.3.

There was a substantial increase in the employment sub-index, though the number remained below 50.

Finance Minister Lou Jiwei said this month that a healthy labour market was more important than reaching the government’s 2014 growth target of about 7.5 percent.

“Weakness is broadly-based with domestic demand softening further,” said Hongbin Qu, chief economist for China at HSBC, in a comment accompanying the PMI data.

“We expect Beijing to launch a series of policy measures to stabilise growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower.”

A string of weak economic indicators this year has reinforced concerns about a slowdown in the world’s second-largest economy.

Earlier this month, sources told Reuters the central bank was prepared to loosen monetary policy in order to keep the economy growing at 7.5 percent. Last year, China’s economy grew 7.7 percent, the same pace as in 2012.

Premier Li Keqiang said last week investment and construction plans would be accelerated to ensure domestic demand expands at a stable rate.

The government wants to reduce the economy’s dependence on exports and enhance the role of consumption, but it is unclear how much growth it might be willing to sacrifice to achieve that.

The Chinese yuan hit a 13-month low on Friday, which traders and analysts attributed in part to attempts by the central bank to curb betting on its appreciation. A weaker yuan could help exports, which stumbled in February.

The Markit/HSBC PMI is weighted more towards smaller and private companies than the official index, which contains more large and state-owned firms.

Both the final Markit/HSBC manufacturing PMI and the official manufacturing PMI for March are due on April 1.

Reuters