File photo of labourers working at the production line of a toy factory in Panyu, south China's Guangdong province.ALY SONG
China is poised to loosen lending requirements further in hopes of stimulating its slowing economy after industrial activity declined for the fifth month in a row.
The HSBC Flash China Manufacturing Purchasing Managers' Index, which measures industrial sector conditions, fell again in March, hitting 48.1, itds lowest level since November.
The reading, which compares with 49.6 in February, is stoking fears of a sharper-than-expected slowdown for the world's second-largest economy and top exporter. China's strong economic growth drove the recovery from the 2008 global financial crisis, but its ability to pace an international economic rise during the present cycle is in doubt.
A so-called hard landing, however, remains unlikely according to experts and economists who said that policy makers still have plenty of options to boost China's economy.
Housing sales in China's once overheated real estate market have slowed significantly in response to government tightening measures. Sales fell 14 per cent year-over-year in January and February. Car sales in the world's largest auto market have also slowed and new loans and retail sales data have come in weaker than expected.
"If you put all the signals together you begin to feel that the Chinese government is concerned about the economy," Na Liu, the founder and head of CNC Asset Management Ltd., and China adviser to Scotia Capital, said in an interview.
The Chinese government is targeting economic growth of 7.5 per cent in 2012, the first time it has aimed at less than 8 per cent growth since 2005.
Even so, policy makers have been taking action to boost the country's slowing economy. They reduced reserve ratio requirements for China's big banks twice since November, reversing a tightening policy that pervaded through 2010 and much of 2011 because of persistent inflation. Mr. Liu is expecting another cut in April to reserve requirements, which currently stand at 20.5 per cent of deposits for the country's largest banks.
In recent weeks, China has quietly relaxed mortgage requirements for first-time home buyers and has also reduced some capital controls on foreign money flowing into local equity markets. The Chinese yuan has been flat against the U.S. dollar so far this year after appreciating almost 5 per cent last year.
If China's official purchasing managers' index, which is based on data compiled by the government, also disappoints, Mr. Liu expects more easing measures from the government and a possible correction in commodity prices.
Even so, he doesn't expect China's central bank to cut interest rates any time soon because bank deposits have been weak and so-called real interest rates, which factor in inflation, have only recently turned positive.
Cutting the benchmark lending rate would "send a bad message" to Chinese consumers who are already cautious about the economy, Mr. Liu said.
Qinwei Wang, China economist at Capital Economics in London, said the flash PMI results show China's manufacturing conditions remain soft but aren't cause for panic yet.
"Fears about a hard landing also seem overdone, given monetary conditions have only started easing significantly in the last few weeks," Mr. Wang said in a note to clients that predicted bank reserve ratio requirements will be cut again in coming weeks.
Commenting on the PMI survey, HSBC's chief China economist, Qu Hongbin, said weak domestic and external demand were responsible for a slowdown in factory orders. "Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authority," Mr. Qu said in a statement.