3rd LD-Writethru: China Focus: China manufacturing PMI falls, inspiring pro-growth policies

China's factory activity continued to lose steam in August, suggesting the world's second-largest economy faces prolonged downward pressure, official data showed Tuesday.

China's manufacturing purchasing managers' index (PMI) for the month came in at 49.7, down from 50 for July, according to data released by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing.

A reading above 50 indicates expansion, while that below 50 represents contraction.

The index fell into contraction territory for the third time this year, and the August reading was the lowest since August 2012.

The production sub-index posted 51.7 last month, still expanding, but lower from 52.4 for July. The sub-index for new orders came at 49.7, down from 49.9 for July, indicating grim challenges in demand.

"Growth momentum was weak in the manufacturing sector," said NBS statistician Zhao Qinghe, attributing the PMI decline mainly to the phasing-out of traditional manufacturing, bad weather, air pollution controls around Beijing, and low commodity prices.

Despite the dreary signs, Zhao said signs of improvements have emerged with steady growth in high-end manufacturing and consumer goods production.

However, other analysts were less optimistic after a private survey by financial information service provider Markit indicated manufacturing PMI was 47.3 in August, much lower than the official line.

Qu Hongbin, chief China economist at HSBC, said the private PMI indicates that China's external and internal demands remain sluggish and there is considerable risk of deflation.

"The Chinese economy is spiralling down, with a murky outlook," said Qu, adding that it was necessary for policymakers to continue monetary easing and expansionary fiscal policy.

China's GDP expanded 7 percent year on year in the first half, in line with the official growth target but still the lowest reading since the second quarter of 2009.

PRO-GROWTH MEASURES

Facing lingering downward risks, authorities have ramped up efforts to prop up the economy.

China's banking and housing regulators slashed down payment requirements for second home purchase using provident funds to 20 percent from 30 percent on Monday, provided the buyers have paid off their mortgages on the first home.

The move is seen as the latest measure from policymakers to step up the recovery of the property sector, a pillar industry for the economy. Yan Yuejin, a Shanghai-based analyst with E-house China R&D Institute, said the new policy exceeded market expectations and indicated strong resolution from the government.

The housing market started picking up in the second quarter after year-long cooling, with sales and prices up in first-tier cities.

Of 70 large and medium-sized cities surveyed in July, new home prices climbed in 31, up from the 27 in the previous month, while 29 reported price declines, down from June's 34, the NBS data showed.

Analysts attributed the recovery to a string of preferential policies since the sector chilled in 2014.

The People's Bank of China, the central bank, lifted mortgage restrictions for second home purchase a year ago and then cut down payment ratios for first homes to 20 percent and second homes to 30 percent in March.

Rating agency Moody's predicted the pressure on the housing market will gradually ease through the rest of the year as house sales rise and developers manage to lower inventory levels.

China's property investment rose only 4.3 percent in the first seven months of 2015, still a drag on the broader economy. But economists expect the negative impact on GDP growth will be smaller this year.

Besides support policies for the property sector, the central bank has cut the reserve requirement ratio and interest rates four times in the year to date in a bid to reduce funding costs for companies and bolster the real economy.

In August, in a move designed to underpin the struggling economy, China finished pumping capital into two of its three policy banks that are responsible for raising funds for large infrastructure projects and for promoting foreign trade and investment.

Infrastructure construction will overtake the stock market to become a major economic driver in the latter half of the year, Minsheng Securities researcher Zhang Yu said.

OUTLOOK BRIGHTENS

Despite economic headwinds, there are still bright spots in the economy thanks to improving key indicators and steady economic restructuring.

China's top economic regulator, the National Development and Reform Commission, on Sunday announced better-than-forecast nationwide power use and railway freight figures, which predicts a recovery in industrial output.

In fact, China has been increasingly reliant on a robust service sector to tackle economic downturn. In contrast with the slowing manufacturing industry, the tertiary sector grew 8.4 percent from a year ago in the first half and contributed up to 49.5 percent of the GDP.

Nicholas Lardy of the Peterson Institute wrote in the New York Times that services, not industry, are driving China's growth, as has been the case for three full years. Lardy said he expects the trend will continue.

Naysayers who believe China is in a financial and economic meltdown misinterpreted the economic data based on outdated thinking, the economist said, citing sound economic fundamentals proved by growth in wages, urban job increases, and rising consumption expenditure of Chinese households.

It is not the picture of an economy heading for a hard landing, he added.

HSBC forecast the Chinese economy will pick up pace in the second half due to pro-growth measures and maintain its full-year GDP forecast at 7.1 percent. Endi