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Chinese factory gauge shows weakness that spurred rate cut

Beijing — A Chinese factory index signalled contraction again last month, 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.

Beijing — A Chinese factory index signalled contraction again last month, 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 (PMI) was 49.9 last month from 49.8 in January, said the statistics bureau and China Federation of Logistics and Purchasing in Beijing. Numbers below 50 signal contraction.

An interest-rate reduction announced on Saturday comes days before an annual gathering of China’s lawmakers, who will approve the budget and announce this year’s growth goal that most economists expect will be lowered to about 7 per cent.

The move to join other nations with more easing reflects deepening concern over an economy squeezed by a property slump, tighter controls over local debt and capital outflows.

“With the property markets deflating and the economy in desperate need of interest-rate relief because of debt, the People’s Bank of China (PBOC) has been forced to take the recent actions,” said Mr Stephen Jen, co-founder of SLJ Macro Partners in London and former International Monetary Fund economist. “China continues to decelerate.”

Non-manufacturing PMI, a gauge for services and construction, rose to 53.9 last month from January’s 53.7. The manufacturing PMI beat economists’ 49.7 median estimate.

China’s economic data in the first two months of the year are often distorted by the Chinese New Year holidays, which stall manufacturing and affect spending patterns.

The PBOC said late on Saturday that the one-year deposit rate would be lowered by 25 basis points to 2.5 per cent, while the one-year lending rate would drop by a quarter percentage point to 5.35 per cent yesterday.

The central bank also raised 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 subsidising debt-funded investment.

Interest rates were lowered for the first time in two years last November. It followed that up with a cut in banks’ required reserve ratio announced on Feb 4, the first across-the-board reduction since May 2012.

The PBOC said that, while the November rate cut achieved “certain effects” in lowering financing costs, economic restructuring and falling global commodity prices had 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. Explaining the cut, it said this does not “represent a change in the prudent monetary policy stance”.

The PBOC joins central banks in Japan and the eurozone that have eased policy this year. The measures come as the United States Federal Reserve moves closer to raising interest rates.

Fed vice-chairman Stanley Fischer said on Friday that the central bank looks likely to raise rates in June or September, unless economic developments warrant a different time.

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