(Bloomberg) — A Chinese factory gauge signaled contraction again in February, a day after the central bank’s decision to step up support for the economy with its second cut to benchmark interest rates in three months.
The government’s manufacturing Purchasing Managers’ Index was 49.9 last month from 49.8 in January, according to the statistics bureau and the China Federation of Logistics and Purchasing in Beijing. Numbers below 50 signal contraction.
An interest-rate reduction announced late Saturday comes days before an annual gathering of China’s lawmakers, who will approve the budget and announce a 2015 growth goal that most economists expect will be lowered to about 7 percent. The move to join global counterparts with more easing reflects deepening concern over an economy squeezed by a property slump, tighter controls over local government debt and capital outflows.
“With the property markets deflating and the economy in desperate need of interest-rate relief because of the high stock of debt, the PBOC has been forced to take the recent actions,” said Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist. “China continues to decelerate.”
Non-manufacturing PMI, a gauge for services and construction, rose to 53.9 in February from January’s 53.7.
China’s economic data in the first two months of the year are often distorted by the Lunar New Year holidays, which stall manufacturing and affect spending patterns.
The one-year deposit rate will be lowered by 25 basis points to 2.5 percent and the one-year lending rate will also drop by a quarter percentage point to 5.35 percent on March 1, the Beijing-based People’s Bank of China said on its website late Saturday.
The PBOC also increased the deposit-rate ceiling to 1.3 times from 1.2, meaning banks can pay a larger margin over the benchmark. That eases the financial repression that has seen China’s savers effectively subsidize debt-funded investment.
The monetary authority lowered interest rates for the first time in two years in November. It followed that up with a cut in banks’ required reserve ratio announced Feb. 4, the first across-the-board reduction since May 2012.
The central bank said that while the November rate cut achieved “certain effects” in lowering financing costs, economic restructuring and falling global commodity prices cut consumer and industrial prices in recent months, leading to higher real interest rates.
Consumer prices rose at the slowest pace in more than five years in January and factory-gate deflation deepened to the lowest level since 2009.
The rate reduction is aimed at creating a “neutral and appropriate” monetary environment, the PBOC said. In a question and answer statement explaining the cut, the central bank said it doesn’t “represent a change in the prudent monetary policy stance.”
The PBOC joins central banks from Turkey to Japan and Australia as well as the euro area that have eased policy this year. The measures come as the Federal Reserve moves closer to increasing interest rates. Fed Vice Chairman Stanley Fischer said on Friday the central bank looked most likely to raise rates in June or September, unless economic developments warranted different timing.