China PMI Could See 9-Month Low

Drop in official rate could lead to additional easing

A stock board in Shanghai. (Photo: AP) A stock board in Shanghai. (Photo: AP)

China’s economy is still slowing, and its official purchasing managers’ index (PMI) could hit its lowest level in 9 months for August. Should that happen, it is likely to increase pressure on the country’s central bank to boost easing measures.

Reuters reported Wednesday that, although the country’s official PMI focuses on larger companies owned by the state and generally portrays a more optimistic scenario, an HSBC flash PMI released last week that focuses on smaller private companies with limited access to bank credit indicated bad news for the huge economy, showing that the official rate could hit 50 when it is released Saturday.

While a PMI of above 50 indicates expansion and below 50 indicates contraction, a considerable volume of weaker than expected economic data for July have driven down optimism that the Chinese economy could speed up again.

Export orders fell and inventories rose in August, pushing factory contraction for the month. Factory output growth also declined, hitting its lowest level in over three years and pointing toward the probability of additional intervention to boost growth.

Wei Yao, China economist at Societe Generale in Hong Kong, said in the report, "It seems that August was not the bottom for the manufacturing sector. Exports have been weakening sharply entering the third quarter." She added, "This may call for faster implementation of policy easing measures."

While Beijing is reluctant to take any action that could drive inflation higher and send real estate prices soaring again, many analysts think that because of the sorry condition of export markets, it may do just that. One possibility is an additional cut in the required reserve ratio (RRR) that banks must keep on hand; the other is a further cut in interest rates.

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