Weak factory data prompt talk of more PBOC action

China PMI highlights overcapacity woes: Xie

China's factory activity continued to lose momentum in November, two surveys showed on Monday, underscoring the challenges manufacturers face amid a cooling economy and prompting talk of further aggressive intervention from authorities.

The official Purchasing Managers' Index (PMI) fell to an eight-month low of 50.3, missing a forecast in a Reuters poll for a 50.6 and down from the 50.8 reading in October.

The HSBC final PMI reading for November, meanwhile, was unchanged from an initial six-month low reading of 50.0, which is right at the breakeven level that separates expansion from contraction.

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The official PMI is focused on larger state-owned factories, while the HSBC survey tends to apply to smaller manufacturers in the private sector.

"November's data signaled a further loss of momentum in China's manufacturing economy, with output declining for the first time since May, albeit marginally," wrote Hongbin Qu, chief China economist & co-head of Asian Economic Research at HSBC.

"Data suggested that softer client demand from abroad had partly dampened overall growth of new work, with new export orders expanding at the slowest rate in five months," he added.

China's slowing economy spurred the central bank (PBOC) into action last month, easing interest rates for the first time in more than two years. The one-year lending rate was cut by 40 basis points to 5.6 percent and the one-year deposit rate was lowered by 25 basis points to 2.75 percent.

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The move surprised many market watchers who had expected Beijing to stick to its scripted targeted measures as the economy adjusts to a slower growth rate amid structural reforms.

"I think the government will continue to loosen monetary policies in the coming months. The economy and the PMI have been hovering around 50 for a long time, so the economy is stuck," independent economist Andy Xie told CNBC following the release of the data.

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Barclays, which correctly predicted a fourth quarter rate cut by the PBOC, now expects further two cuts in benchmark interest rates in the first half of 2015, and "three cuts in the reserve requirement ratio, with the first likely this December."

"Given China's structural challenges, we continue to believe more rate cuts are necessary," Jian Chang of Barlays said in a note. "We believe that lowering rates will mainly help to reduce the debt burden, lower financial risks, support business sentiment, and sustain private demand."

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But Chang notes that it remains unclear how much of the cut in the lending rate will be passed on to borrowers, as "banks face a squeeze in interest rate margins."

"While existing loans will certainly benefit from the 40 basis point benchmark rate cut, new loans may not. This is because banks, facing possibly higher deposit rates than before, have less incentive to reduce lending rates," said Chang, who is maintaining his 7 percent growth forecast for 2015, but sees "downside risks to this forecast reduced."

China's economy grew 7.3 percent in the third quarter from the year-ago period, its slowest rate since the global financial crisis. The government has a target of near 7.5 percent growth for the full year and some analysts say the rate cut was an attempt to engineer the outcome.

But Xie says tweaking monetary policy alone may not be effective in propping up growth.

"[China's] investment cycles are very long and the monetary policy doesn't work very well. If the government wants to stabilize the economy, they have to try to cut taxes, otherwise the economy will continue to deteriorate," he said.