China Factory Sector Shrinks First Time in Nearly 3 Years

China's factory sector shrank in November for the first time in nearly three years, an official purchasing managers' index (PMI) showed on Thursday, underlining the central bank's move to cut bank reserve requirements to shore up the economy.

AFP | Getty Images

The fall in the PMI to 49 from 50.4 in October is likely to feed worries that the global economy is on a slippery slope as the euro zone struggles to decisively tackle its two-year debt crisis. China's export orders fell sharply.

The PMI from the China Federation of Logistics and Purchasing (CFLP) was below the median forecast of 50 in a Reuters poll. That level demarcates expansion from contraction.

The PMI has been around 50-51 since June.

"The November PMI dropped further to below the boom-bust line of 50... indicates that the economic growth pace would continue to moderate in the future," Zhang Liqun, a researcher with the Development Research Centre of the State Council, wrote in the CFLP statement.

China's economic growth has been slowing all this year as Europe and the United States — China's top two export markets — have struggled to recover from the global financial crisis in 2008-2009.

In addition to global headwinds, China's once red-hot real estate sector is slowing down as home prices and sales fall.

China's central bank cut the reserve requirement ratio for its commercial lenders on Wednesday for the first time in nearly three years to ease credit strains and shore up an economy running at its weakest pace since 2009.

The reserve cut, effective Dec 5, reduces the ratio for the biggest banks to 21 percent from a record high 21.5 percent, freeing up funds that could be used for lending to cash-strapped small firms.

The CFLP said the sub-index for new orders fell to 47.8 in November from 50.5 in October, while the sub-index for new export orders dipped to 45.6 in November from October's 48.6.

But the slowdown in economic growth appears to have helped cool price pressures, with the prices sub-index of the official PMI falling to 44.4 from October's 46.2.

China's annual consumer inflation dipped to 5.5 percent in October from September's 6.1 percent, pulling back further from July's three-year peak of 6.5 percent, giving Beijing more room for measures to cushion the economy from the slowdown.

Last week, HSBC's flash PMI showed China's factory sector shrank the most in 32-months in November. HSBC said the figures implied annual output growth of 11-12 percent, a pace not seen since 2009 when China was pulling out of the global crisis.

The official PMI is weighted more towards big state-owned firms, unlike the HSBC PMI which is biased towards small private companies.

Factory output, which accounts for 40 percent of gross domestic product, hit its weakest pace in a year in October, even though expansion in the first 10 months of 2011 averaged 14.1 percent.