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 Signs of a weakening labor market reinforced expectations that China
would further relax financing conditions in coming weeks, but stop
short of cutting interest rates or loosening the reserve requirement
for all banks to support the economy.
The HSBC/Markit Flash China Purchasing Managers' Index (PMI) rose to
50.5 in September from August's final reading of 50.2.
Economists polled by Reuters had expected factory growth to stall at
50.0, the mark which separates expansion from contraction, citing
deteriorating business confidence and the growing drag from the
cooling property market.
"We believe liquidity conditions will be easy," said Ting Lu, an
economist at Bank of America-Merrill Lynch. "But we don't expect a
universal cut in interest rates or the reserve requirement ratio."
Instead, policymakers are likely to lower select lending rates such
as mortgage rates, and the central bank may extend more loans to big
banks with the cash being re-lent to businesses under a "re-lending"
exercise, Lu said.
Economists' bets that there would be no overt policy easing are in
line with remarks by senior leaders such as Finance Minister Lou
Jiwei, who said over the weekend that China would not dramatically
alter its policy based on any one indicator.
But the government's promises to desist from ramping up credit
supply are increasingly being tested by a run of data showing that
the world's second-biggest economy is sliding into a deeper
slowdown.
Tuesday's PMI showed a measure of employment shed more than a point
to drop to 46.9, its lowest since February 2009 during the global
financial crisis, when a collapse in exports threw tens of millions
of Chinese out of work.
A hefty drop in employment could raise alarm bells for the
government, which has indicated it will tolerate slower economic
growth below 7.5 percent for the year as long as employment is not
affected.
"The real estate risk is already materializing," said Dariusz
Kowalczyk, an economist at Credit Agricole Corporate and Investment
Bank in Hong Kong.
"This will keep gross domestic product growth at a depressed level
of around 7 percent year-on-year this quarter."
Still, Asian markets found consolation in the PMI poll that China's
economy was not faring as badly as some feared. Stock markets and
the Australian dollar <AUD=D4> clawed back some of their early
losses, while Shanghai stocks <.CSI300> rose.
NO AGGRESSIVE MEASURES
China's urban unemployment rate was nearly 4.1 percent at the end of
June, though many economists believe the real number may be much
higher given its army of migrant workers.
The employment index aside, other measures in the PMI poll fared
better, which could temper Beijing's policy response for now.
Total new orders rose, and new export orders also climbed to their
highest level since March 2010.
The overall output level remained flat on the month, while output
prices fell to a six-month low.
The final HSBC/Markit manufacturing PMI for the month is due on
Sept. 30, with the official reading on Oct. 1.
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The HSBC survey largely covers small- to medium-sized companies,
which are facing tighter credit conditions and greater stresses than
the larger, state-owned firms which the official report tends to
focus on. Smaller firms account for about 60 percent of gross
domestic product and 75 percent of the new jobs created in the
country.
A dramatic increase in reliance on state support starkly illustrates
the industrial weakness that is weighing on the economy. Subsidies
accounted for four-fifths of the profits reported by Chinese steel
companies in the first half of this year, according to a Reuters
analysis of corporate financial statements.
"We still expect some more measures to support growth, such as
stimulating infrastructure investment, relaxing property market
policies and some more monetary easing steps," said Louis Kuijs, an
economist at RBS in Hong Kong.
"However, the recent signs of policymakers suggest to us that they
will not resort to more significant and higher profile measures
unless growth takes another turn for the worse."
GRADUAL SLOWDOWN
Export growth has been unsteady, and the cooling housing market is
undermining already softening domestic demand. Recent data showed
factory output grew at the weakest pace in nearly six years in
August.
Prices for Chinese steel and iron ore futures have slumped to record
lows, while oil, copper, rubber and other raw materials have also
skidded on fears of slowing China demand, which is rapidly leaving
the United States as the only major driver of world economic growth.
Chinese leaders have publicly ruled out another massive stimulus
program this year like the one launched during the global financial
crisis, but are prepared to take targeted measures supporting the
most vulnerable sectors.
Further measures are already being rolled out even as leaders
publicly advise caution.
The central bank last week injected money into the country's top
banks in a bid to help support the economy by keeping borrowing
costs down, and media have reported this week that the "Big Four"
banks plan to ease rules on mortgage lending in a move orchestrated
by regulators.
"The economy still faces significant headwinds, particularly from
the property sector, and our base scenario remains a gradual
slowdown in the coming months," Capital Economics said in a note to
clients.
(Editing by Kim Coghill and Jacqueline Wong)
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