Asia Economy

China factory sector shrinks in February, official PMI shows

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Activity in China's factory sector contracted for a second straight month in February on unsteady exports and slowing investment, an official survey showed on Sunday, reinforcing bets that more policy loosening is needed to lift the economy.

The official Purchasing Managers' Index (PMI) inched up to 49.9 in February from January's 49.8, a whisker below the 50-point level that separates growth from contraction on a monthly basis.

Analysts polled by Reuters had forecast a weaker reading of 49.7.

A separate official services PMI, also released on Sunday, showed growth in the sector accelerated to 53.9, up from 53.7 in January.

Accounting for 48 percent of China's $10.2 trillion economy last year, the services sector has weathered the growth downturn better than factories, partly because it depends less on foreign demand.

The official PMIs were released shortly after China's central bank cut interest rates late on Saturday, the latest effort to support the world's second-largest economy as its momentum slows and deflation risks rise.

Legislature to convene

The PMIs are the last official Chinese data to come out before the opening this week of the annual session of China's legislature, where leaders will announce a growth target for 2015.

The final February reading for the HSBC manufacturing PMI survey will be announced on Monday. The flash estimate showed factory growth edged up to a four-month high in February, but export orders shrank at their fastest rate in 20 months.

To boost a sagging economy, China's central bank lowered the reserve requirement - the ratio of cash that banks must set aside as reserves - in February for the first time in over two years.

That was after it had cut interest rates in November, also for the first time in more than two years.

Despite the raft of stimulus moves, a newspaper owned by the central bank warned on Wednesday that China is dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy that is not gaining speed.

A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure China's economy dragged growth to 7.4 percent last year - a level not seen since 1990.

Reflecting China's "new normal" of slower but better-quality growth, economists at state think-tanks with knowledge of policy discussions said the government is likely to lower its 2015 economic growth target to around 7 percent, from last year's 7.5 percent.