China HSBC PMI contracts in December, raising growth concerns

After poor flash PMI, what does China need to do?
After poor flash PMI, what does China need to do?   

Chinese factory output fell for a second straight month in December, boosting expectations that more stimulus measures will be needed to avoid a sharper slowdown amid slowing activity in the world's second-largest economy.

The flash HSBC/Markit China manufacturing purchasing managers' index (PMI) slipped to 49.5 from a final reading of 50 in November, contracting for the first time in seven months. The 50-point level separates growth from contraction.

"This means that China is leaving this year on a very weak note," Frederic Neumann, MD & co-head of Asian economics at HSBC, told CNBC. "We see a contraction in the manufacturing sector. Even new orders - a forward-looking indicator - points to further weakness ahead. I think they need to ease more just to right the ship again."

"We think next year growth will be around 7.3 percent, but that's contingent upon [the central bank] easing more," Neumann added. "If they just let this [continue] at the current pace, probably growth will head to a 6 [percent] handle, so more monetary easing and rate cuts are needed to add some spice to the economy."

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The data followed below-view readings on Chinese trade and inflation figures last week, which increased speculation that the People's Bank of China could undertake easing measure to support the economy. The central bank cut interest rates for the first time in two years in late November as growth appeared on course to undershoot the 7.5 percent 2014 target set earlier in the year.

Over the weekend, a central bank paper said that growth could slow to 7.1 percent in 2015.

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"While some would have hoped to see disappointing China data result in growing calls for stimulus, this has not been the case today and we've actually seen investor concerns heighten. China activity generally ramps up heading into the back end of the year, but it doesn't seem like this will be the case this time," Stan Shamu, market strategist at IG, said in a note.

"The People's Bank of China's chief economist Ma Jun's downgrade of 2015 growth to 7.1 percent is fast being justified. The fact the Fed's actions were cited as a key reason implies any signs of earlier than expected tightening could have further implications on these growth figures," he said.