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China’s PMI Drops to a Seven Month Low, Now in Recession Territory

“BEIJING—China’s factory activity lost ground in February, as a key gauge of manufacturing slipped to a seven-month low, signaling further economic weakness and rattling markets.

Some analysts called for more government support for the world’s No. 2 economy to ensure that momentum doesn’t slow further. But Beijing may be comfortable with an economy that is expanding—though at a slower pace—as it seeks to focus on longer-term structural changes that will reduce the reliance on government investment and export-led manufacturing for growth.

The preliminary HSBC China Manufacturing Purchasing Managers’ Index, a gauge of nationwide manufacturing activity, fell to 48.3 in February from 49.5 in January, HSBC Holdings HSBA.LN -0.87% PLC said Thursday.

A reading above 50 indicates expansion from the previous month, while a reading below 50 indicates contraction.

“There is continued downward pressure on the economy,” said Ding Shuang, economist at Citigroup. “Economic growth will continue to decline to 7% over the next two quarters.”

With domestic demand weak and the global economy still recovering, China’s economic growth slowed to 7.7% in the final quarter of last year from 7.8% in the third quarter.

A government official said this week that the government is looking for growth in industrial output of about 9.5% this year, down from 9.7% last year. Manufacturing is still a major driver of growth, and such a slowing would point to overall weakness ahead. A weaker Chinese economy would mean softer global demand for commodities from grains and metals to coal and oil.

The Australian dollar slipped against the U.S. currency after the release of the manufacturing PMI data. Australia is a major supplier of resources that fuel China’s economic expansion. Hong Kong’s benchmark stock index and shares in Tokyo were also under pressure.

HSBC economist Qu Hongbin said that China needs to make policy adjustments to ensure sufficient momentum in the economy. “We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year,” he said.

Nomura economist Zhiwei Zhang said he expects Beijing to act. “We reiterate our view that the recovery in China is not sustainable and that GDP growth will slow to 7.5% year on year in the first quarter and 7.1% in the second quarter despite favorable base effects,” he said, adding, “we expect the government to loosen monetary policy in the second quarter to support growth.”

But others said that the weak measure of the nation’s manufacturing health was partly due to the timing of the Chinese Lunar New Year holiday.

They also noted that government policy makers have so far been comfortable with slightly slower growth, though they are carefully watching the employment situation….”

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