China central bank steps up easing tempo as factory activity shrinks

Sun Mar 1, 2015 3:36am EST
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By Pete Sweeney

SHANGHAI (Reuters) - Weakness in China's vast manufacturing sector, aggravated by high real borrowing costs and weak demand, appears to have driven the central bank to accelerate the pace of monetary easing to ward off deflation in the world's second-largest economy.

Cuts to benchmark lending and deposit rates, announced by the People's Bank of China (PBOC) on Saturday evening, pre-empted official data released on Sunday that showed a second consecutive month of shrinking manufacturing activity for February.

While economists had been predicting further easing to support the struggling economy, some were surprised that the PBOC made its move just days before China's national legislature will meet to set the official economic growth target for 2015.

"This rate cut signals policymakers' willingness to take further action to ease financing conditions in an effort to maintain stable growth," wrote Nomura analysts' in research note that said the cut had come sooner than predicted. "It also suggests that growth may have slowed sharper than we expected."

China posted its slowest growth in decades in 2014, at 7.4 percent, and sources told Reuters in January the government had settled on a target around 7 percent this year.

While Beijing has signaled it is comfortable with a moderating pace of growth as it shifts away from investment-intensive export manufacturing toward services, that transition remains a work in progress and the factory sector is still a major employer and consumer in its own right.

Although China's official purchasing managers index (PMI) remained below the 50-level that separates expansion from contraction in February, at 49.9 it had rebounded slightly from January's reading and also beat more pessimistic forecasts.

A preview of the data was not enough, however, to dissuade the PBOC from making its second interest rate cut since a surprise reduction in November.   Continued...

An employee works at a logistic center in Huaibei, Anhui province, January 20, 2015. REUTERS/China Daily