China factory activity falters, markets take fright

Thu Mar 22, 2012 7:55am EDT
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By Nick Edwards

BEIJING (Reuters) - China's economic momentum slowed in March as factory activity shrank for a fifth straight month, leaving investors fretting about the risks to global growth and anticipating fresh policy support from Beijing.

The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6. New orders sank to a four-month low, an expected rebound in export orders failed to emerge and new hiring slumped to a two-year low.

"With new export orders sluggish and domestic demand still softening, China's slow down has yet to finish. This calls for further easing to come from Beijing," HSBC chief China economist, Qu Hongbin, said in a statement.

Investors immediately hedged exposures to trades betting on a rebound in global growth. Brent crude oil shed half a percent, Hong Kong's Hang Seng stock index sank 0.1 percent into the red to reverse early gains of 0.7 percent and the Australian dollar skidded to a two-month low.

Broad-based weakness in the five key components that generate the headline index level surprised analysts, particularly those who had anticipated a clear cut rebound in factory activity in March after the Lunar New Year disrupted output in the first two months and distorted the data.

"This data suggests there's something more profound at work, that it's not just a Lunar New Year problem and that it's not just affecting exports, but domestic demand," Tim Condon, chief economist and head of Asian research at ING in Singapore, said.

"We'll be talking about this all day. This will be news on (TV) tonight in the U.S., the weak China PMI," he told Reuters.

An index reading of 50 marks the line between expansion and contraction, according to the methodology of the survey compiled by UK-based data provider, Markit.   Continued...

Labourers work at the production line of a toy factory in Panyu, south China's Guangdong province in this September 4, 2007 file photograph. China's manufacturing sector activity shrank in March for a fifth successive month, with the overall rate of contraction accelerating and new orders sinking to a four-month low, the HSBC flash purchasing managers index showed on March 22, 2012. The PMI, the earliest indicator of China's industrial activity, fell back from February's four month high, slipping to 48.1, within a whisker of the level that economists at HSBC consider a crucial level dividing decline from growth. REUTERS/Aly Song/Files