China Feb factory activity shrinks more than expected, layoffs on the rise

Mon Feb 29, 2016 10:42pm EST
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By Nathaniel Taplin and Pete Sweeney

SHANGHAI (Reuters) - Activity in China's manufacturing sector shrank more sharply than expected in February, surveys showed on Tuesday, prompting smaller companies to shed workers at the fastest pace in seven years and suggesting Beijing will have to ramp up stimulus to avoid a deeper economic slowdown.

Some investors had been bracing for weak readings after the central bank unexpectedly eased policy late on Monday, injecting an estimated $100 billion worth of cash into the banking system to cushion the pain of upcoming reforms such as restructuring bloated state enterprises.

The official Purchasing Managers' Index (PMI) fell to 49.0 in February from January's reading of 49.4 and below the 50-point mark that separates growth from contraction. Economists polled by Reuters had expected only a slight dip to 49.3.

It was the lowest reading since November 2011.

"The PMI came in much weaker than markets expected, hinting that recent easing measures have had limited impact in turning around the weakening manufacturing sector," wrote senior emerging markets economist Zhou Hao at Commerzbank in Singapore.

"We think PBoC will cut policy rates by 25 basis points in the first quarter and lower RRR (banks' reserve requirement ratio) by another 100-150 basis points this year."

The private Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI), which focuses more on small to medium- sized, private firms, showed activity contracted for a 12th straight month. It fell to 48.0, below market expectations of 48.3 and January's reading of 48.4.

Both surveys showed conditions in China's job market were continuing to deteriorate, challenging policymakers who are finalising Beijing's next five-year development plan ahead of the annual parliament meeting starting on March 5.   Continued...

Employees work at a shoe factory in Lishui, Zhejiang province, in this January 24, 2013 file photo.  REUTERS/Lang Lang/Files