Manufacturing activity falls to lowest level in eight months as Beijing's economic reforms start to bite

This article is more than 6 years old

This article is more than 6 years old

China's factories cut their output in the first three months of the year, according to a survey of the manufacturing sector that has sparked warnings of slower growth in the US and the eurozone.

Manufacturing activity across China dropped to its lowest level for eight months as economic reforms put in place last year restricted access to cheap finance and cut support for unprofitable firms.

The survey indicated that Beijing will be forced to relax plans to end state support for some uncompetitive areas of the economy.

Earlier this month the premier, Li Keqiang, told lenders to China's private-sector factories they should expect debt defaults in the year ahead.

Speaking after the annual session of the national people's congress, Li said: "We are going to confront serious challenges this year and some challenges may be even more complex," referring to rising pollution levels and a crackdown on corruption.

The central bank in Beijing is understood to be ready to loosen monetary policy in order to keep the economy growing at the 7.5% target set by the Communist ruling elite. Last year, China's economy grew 7.7%, the same pace as in 2012, but looks as if it may struggle to hit the 2014 target.

Appearing to be spooked by the possibility of a sharp downturn in growth, Li said ahead of the latest figures that investment and construction plans would be accelerated to ensure domestic demand expands at a stable rate.

Wei Yao, China economist at Société Générale in Hong Kong said there was a strong argument for the government to intervene to prevent a loss of confidence.

"Usually, for the month of March, the PMI [purchasing managers' index] will rebound, because after Chinese New Year there should be some activity coming back, but this PMI is disappointing. The government probably will have to provide some supporting measures," he said.

Capital Economics said the figures, while weak, would not be enough to trigger government action.

"Those hoping for significant policy stimulus from Beijing will be disappointed. Growth has slowed but it has not come to a halt. Moreover, there are no signs of stress in the labour market either in this survey or from other data, and this is arguably policymakers' primary concern," said Andrew Kenningham, senior global economist.

World markets fell on the news, which some economists said could undermine hopes of a smooth recovery in the UK, the eurozone and to a lesser extent the US.

The FTSE ended the day down 36 points at 6520 while the German Dax was 154 points lower and the Dow Jones was down 60 points by lunchtime in New York.

"It tells you something about the extent to which market concerns about a slowdown in China are justified," said Peter Dixon at Commerzbank. "In the eurozone, the economy is bowling along at a reasonable pace."

US manufacturing performed solidly in March, though at a slower rate than in recent months.

An expansion in both the eurozone's manufacturing and services industries, and growth in its second-biggest economy, France, meant the bloc's recovery pace barely slowed from February's two and a half year high.

But the threat of deflation in the region was highlighted by surveyed firms' increasing willingness to cut prices to attract customers. Optimism was also dented by warnings from the German manufacturing sector of a slowdown as firms headed into the summer.

Lombard Street Research director Charles Dumas said growth in Spain should also be treated with scepticism after recent data showed that most of the expansion in recent months was fuelled by government investment while the private sector continued to struggle.