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An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, Feb. 28, 2013. Growth in Chinese factories cooled in February to a five-month low after domestic and foreign demand slackened. (WILLIAM HONG/REUTERS)
An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, Feb. 28, 2013. Growth in Chinese factories cooled in February to a five-month low after domestic and foreign demand slackened. (WILLIAM HONG/REUTERS)

China factory growth fizzles as demand wanes Add to ...

China’s factory growth cooled to multi-month lows in February as domestic demand dipped, weighing on firms already hit by slack foreign sales and underlining the patchiness of the country’s economic recovery.

But the bigger-than-expected retreat in two purchasing managers’ indexes (PMIs) on Friday does not signal China’s economy is slipping into another slowdown, analysts said. Instead, they show China’s recovery this year would be mild, as widely expected.

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Separate data from China’s bank regulator that showed banks weathered their worst economic downturn in 13 years last year without any rise in bad debt ratios could further assuage investors worried about the health of the world’s No. 2 economy.

An official PMI from the National Bureau of Statistics eased to 50.1 after seasonal adjustments in February, the weakest reading in five months and just above the 50-point level demarcating growth from contraction on a monthly basis. January’s reading was 50.4.

A second PMI issued by HSBC fell to a four-month low of 50.4 after seasonal adjustments, off January’s two-year high of 52.3 and in line with a flash reading in late February.

“Today’s data point to a stabilization of economic activity in coming months, not a strong recovery in growth,” said Jian Chang, a Barclays analyst.

Unlike recent months when lethargic foreign demand for Chinese goods was the Achilles’ heel for factories, domestic demand was surprisingly soft in February and an additional challenge for firms already fighting weak sales abroad.

The official PMI survey, the larger of the two surveys with a sample size of 3,000, showed growth in new orders fell while export orders contracted from January.

New orders hit a four-month low of 50.1 while new export orders dropped to a five-month low of 47.3. In the HSBC survey, the new orders sub-index fell to 51.4 from January’s two-year-high, while export orders was little changed above 50 points.

China’s statistics agency said large companies grew in February while mid– and small-sized firms shrank.

Among sectors, ferrous and non-ferrous metal smelters and special equipment makers received more new orders, while new orders fell for textile and furniture makers, and wood and food processors.

Analysts said the uneven pace of growth suggests China’s modest economic rebound requires no change in monetary policy for now.

“The pace of the ongoing recovery is mild, implying no need for the Peoples’ Bank of China to tighten policy any time soon,” said Qu Hongbin, an HSBC economist in Hong Kong.

China’s bank regulator said on Friday the non-performing ratio for commercial banks averaged 0.95 per cent at the end of 2012, unchanged from October.

It said banks were also well capitalized with the weighted average capital adequacy ratio rising to 13.3 per cent in December, up from October’s 13 per cent.

In general, a higher capital adequacy ratio is seen as good for the financial system as lenders have more cash to cover the cost of unforeseen risks, benefiting depositors. The downside for investors is that a high ratio could crimp profitability.

New Basel III capital rules call for a core Tier 1 capital adequacy ratio of at least 7 per cent.

But some analysts have cautioned low bad debt ratios in Chinese banks may not last.

Credit Suisse said in a note last month China’s central bank has printed more money in recent years than its U.S., European and Japanese counterparts.

It estimated China’s M2 money supply as a proportion of gross domestic product is 187 per cent, higher than Japan’s approximately 170 per cent.

Combined with runaway growth in the Chinese shadow banking sector, Credit Suisse argued that China is inflating a “credit bubble” that could end painfully in the next few years when quickening inflation prompts Beijing to lift interest rates.

“That should dry up the fund influx into bond market and wealth management products,” the bank said.

“We believe any consequential defaults of shadow banks might force banks into bailouts,” it said, adding that bad debt ratios could rise sharply.

Even if inflation could trigger the next rout in China’s financial sector, as predicted by Credit Suisse, the danger of a fast rise in consumer prices seems muted for now.

The PMIs showed lacklustre manufacturing growth is capping inflation in Chinese factories.

Input prices for the HSBC PMI slipped from 16-month highs, while output prices edged lower to hover above the 50 level. The official PMI survey also showed input prices receding from 17-month highs.

Although both the official and HSBC PMIs are seasonally adjusted to account for the long Lunar New Year holiday, which falls in either January or February depending on the year, some economists still attribute data fluctuations in this period to holiday distortions.

The fact that most factories are shut during this time of the year, sometimes for as long as three weeks, makes it difficult for any publisher of Chinese PMI to properly adjust their data for seasonalities, some analysts say.

Tim Condon, head of Asian economic research at ING in Singapore, argued China’s economic data in January and February has “a lot of noise” due to the holiday season.

“When it settles down we expect the data will reveal that industrial production is growing at around 10 per cent,” said Condon, Condon, who has a rosier view of China’s economy in 2013 than his peers, predicts it would grow 9 per cent this year. Economists polled by Reuters in January expect a median growth rate of 8.1 per cent.

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