China factory activity falls for third month - HSBC PMI

A labourer works at a valve factory in Wenzhou, Zhejiang Province October 18, 2011.

BEIJING (Reuters) - China's factory activity shrank for a third successive month in January, a private-sector survey of purchasing managers showed on Wednesday, reinforcing views that Beijing's pro-growth policy stance will stay despite some signs of improving demand.

The HSBC final manufacturing purchasing managers index (PMI) stood at 48.8 in January, a reading signalling contraction albeit at the slowest pace in three months. It confirmed an initial reading taken just before China's Lunar New Year holiday and was a slight improvement on the 48.7 recorded in December.

Turnarounds in sub-indexes measuring new export orders and backlogs of work showed strengthening activity, while new orders overall ticked to a three-month high -- failing by only a narrow margin to get back above the 50 level which demarcates expansion from contraction.

But the areas of concern overshadowed the bright spots, with the overall output index pointing to contraction at a faster rate in January than December -- a trend reflected in quantities of purchases which sank to a near three-year low.

"The final results of January's PMI survey confirmed the still weak growth momentum of manufacturing activities into the New Year," Qu Hongbin, chief China economist at HSBC said in a statement accompanying the index.

"This calls for more aggressive easing measures to support growth, given that inflation is no longer a concern," he added.

Front-loading production ahead of the early Lunar New Year break has led to some suspicion of the immediate durability of the rebound in new orders.

A surprising uptick in hard economic data showing industrial output growth accelerated by 12.8 percent in December 2011 from a year ago and a year-on-year 18.1 percent jump in retail sales are widely attributed to the holiday effect.

Those figures are at odds with deteriorating demand from China's biggest trading partners in the European Union and the United States that helped drag growth in the world's second-biggest economy down to its lowest in 2-1/2 years in the final quarter of 2011.

EXPORT SENSITIVE

The HSBC PMI index, compiled by UK-based data provider Markit, is regarded as being particularly sensitive to the demand trends for China's massive exporting sector as it captures data mainly from the small and medium-sized private sector enterprises that drive it.

The official PMI, from the China Federation of Logistics and Purchasing, gathers data from bigger, state-backed firms.

The consensus view is that things will have gotten worse across the economy in the first three months of 2012, dragged down by a fall in fixed-asset investment growth and a further slowdown in the rate of property investment that are key drivers of expansion in the world's second biggest economy.

HSBC's Qu believes annual Q1 growth could be as low as 8 percent. A Reuters poll of economists forecasts expansion of 8.2 percent in Q1, which is expected to be the low point of a full year's growth that is likely to be China's slowest in a decade.

The pullback in activity has fuelled expectations the government will take more forceful measures to bolster growth and save jobs, beyond the so-called fine-tuning it began to implement in October, in the face of a festering European debt crisis and a sharp slowdown in the domestic property sector.

Beijing reduced the amount of cash that banks have to hold as reserves in November for the first time in three years in a bid to shore up cooling economic activity and maintain a steady supply of credit to companies and consumers.

That 50 basis point cut to 21 percent is forecast by economists to be followed by up to 200 bps more throughout the course of 2012, according to a Reuters poll.

"Once filtering through, the policy easing should secure a soft-landing in 2012," HSBC's Qu said.

(Reporting by Nick Edwards; Editing by John Mair)