China March flash HSBC PMI contracts to 11-month low, fans policy easing expectations

Activity in China's factory sector dipped to a 11-month low in March as new orders shrank, a private survey showed, signalling persistent weakness in the world's second-largest economy that will likely fuel calls for more policy easing to support growth.

The poor reading added to signs that the economy has lost momentum despite two interest rate cuts since November, a reduction in the amount of money banks must keep in reserve and repeated attempts by the central bank to reduce financing costs.

The flash HSBC/Markit Purchasing Managers' Index (PMI) dipped to 49.2 in March, below the 50-point level that separates growth in activity from contraction on a monthly basis.

Economists polled by Reuters had forecast 50.6, slightly weaker than February's final PMI of 50.7.

Some analysts expect first-quarter economic growth to dip below the government's new full-year target of 7% - widely seen as the level needed to keep employment steady.

"The weaker PMI data could increase pressure for policy loosening," economists at CICC said in a research note.

They predicted the central bank would cut banks' reserve requirement ratios (RRR) six more times this year, on top of another interest rate cut.

JPMorgan said the next RRR cut may come as soon as April.

Asia stocks fell after the PMI report on Tuesday, with shares in Shanghai skidding more than 2 percent, while the Australian dollar dipped.

However, a separate industry survey released by China Beige Book (CBB) on Monday showed that while Chinese firms grew even more wary of borrowing and investing in the first quarter, they still managed to defend profit margins thanks to lower input costs for commodities and labor.

"With firm performance and the labor market both in decent shape, the absence of heavy stimulus should be surprising only to those analysts who still make policy predictions based on GDP," Leland Miller, president of CBB, wrote in the report.

JOB SHEDDING

The PMI survey suggested that manufacturers faced considerable challenges from weaker domestic demand and deflationary risks.

The new orders sub-index fell to a 11-month low of 49.3 in March. New export orders decreased for a second straight month, albeit at a slower pace.

Strains on the job market continued to rise, with the employment sub-index contracting for a 17th straight month and hitting its lowest since the depths of the global financial crisis.

China's leaders have said they would be willing to tolerate somewhat slower growth as long as the labour market remained resilient.

"A renewed fall in total new business contributed to a weaker expansion of output, while companies continued to trim their workforce numbers," said Annabel Fiddes, an economist at Markit said.

"Manufacturing companies continued to benefit from falling input costs, stemming from the recent global oil price decline. However, relatively muted client demand has led firms to pass on savings in a bid to boost new work, and cut their selling prices at a similarly sharp rate."

In Japan, a similar manufacturing survey added to concerns that its slowly recovering economy also may be losing momentum, with activity expanding at a much slower clip as domestic orders contracted.

GROWTH WEAKENING

China's economy faces increased downward pressure this year but the slowdown is stabilising, with employment and services among the bright spots, Vice Premier Zhang Gaoli said on Sunday.

Weighed down by a property downturn, factory overcapacity and local debt, growth is expected to slow to a quarter-century low of around 7% this year from 7.4% in 2014, even with expected additional stimulus measures.

Data so far in 2015 indicate the new growth target may already be at risk, though the Asia Development Bank said on Tuesday that it still expects 7.2% growth this year.

Annual economic growth could slow to 6.85% in the first quarter from 7.3% in the fourth quarter of 2014, the Chinese Academy of Social Sciences, a top government think-tank, said in a research report on Sunday.

It expected growth to cool further to 6.8 percent in the second quarter.

China's third-largest listed lender, Agricultural Bank of China Ltd (AgBank) , late on Tuesday reported weaker-than-expected profit and a rise in bad loans as slowing economic growth hit borrowers in the manufacturing,
wholesale and retail sectors in particular.

Bad loans to manufacturers rose to 3.69% at the end of 2014 from 2.86 percent a year earlier. Those to wholesalers and retailers more than doubled to 5.93% from 2.36%.

Meanwhile, central bank governor Zhou Xiaochuan cautioned against loosening monetary policy abruptly, saying that could undermine structural reforms.

The government also plans to run its biggest budget deficit in 2015 since the global crisis to boost spending, but analysts doubt investment will pick up sharply this year given that local governments are hard-pressed by piles of debt.