China factory activity hits 3-year low in November

Persistent deflation in upstream prices to add pressure to factory gate prices and industrial profits, say analysts

Manufacturing activity in China hit a three-year low in November, an industry survey showed Tuesday, supporting the case for more accommodative policies as authorities seek to prop up growth in the world's second largest economy.

China's National Bureau of Statistics' official Purchasing Managers' Index (PMI) hit 49.6 in November, its lowest reading since August 2012 and down from the previous month's reading of 49.8. This was below a Reuters poll forecast of 49.8 and marked the fourth straight month of contraction in the sector.

A reading below 50 points suggests a decline in activity on a monthly basis while a reading above signifies an expansion.

"With soft growth momentum and deflation pressures creeping up, we expect the authorities to further ease monetary policy and continue to implement an expansionary fiscal policy in order to prevent further slowdown of the economy in 2016," Li-Gang Liu and Louis Lam, ANZ economists said in a research note released after the data.

Separately, the Caixin/Market China Manufacturing PMI edged up to 48.6 in November, beating market expectations of 48.3, which would have been unchanged from the previous month. The index has shown contraction for nine straight months.

The private sector Caixin survey focuses more on small-to-medium-sized private firms, which are showing more stress from the prolonged economic slowdown and high financing costs, while the official versions look more at larger, state-owned firms.

The official PMI's sub-indexes showed widespread weakness in manufacturing with new orders - a proxy for domestic and foreign demand - down 0.5 points to 49.8 and exports contracting to 46.4 for the 14th straight month. Input prices declined 3.3 points to 41.1.

ANZ economists said this points to persistent deflation in upstream prices, which would add pressure to factory gate prices and industrial profits.

Service sector activity, which has helped offset the wider effects of weakness in manufacturing, improved with the official non-manufacturing PMI up half an index point to 53.6.

"The services sector appears strong and there are some hints that accelerating credit growth and fiscal spending may have continued to support investment growth last month, following a rebound in October," Julian Evans-Pritchard, an economist at Capital Economics, wrote in a research note.

Despite a long series of stimulus measures, including cutting interest rates six times since November last year, muted monthly data for October suggests China's economic momentum continues to slow.

Some analysts expect China's economy will bottom out in the fourth quarter as a burst of stimulus measures rolled out by Beijing gradually takes effect, but many remain wary about the outlook.

China's Premier Li Keqiang said last week that China was on track to reach its economic growth target of about 7 percent this year, and that the economy was going through adjustments to maintain reasonable medium- to long-term growth.

But that would still mark China's weakest economic expansion in a quarter of a century, and some analysts believe real growth levels are much weaker than official data suggest.