The HSBC China Manufacturing PMI fell to 49.2 in the flash reading for March, the lowest since May 2014, the global bank reported Tuesday.

The first data point for the year free of holiday distortions hints that underlying demand has weakened further since late 2014. Domestic demand remains sluggish and external orders continued to contract. New orders contracted sharply, and employment sub-index also suggested signs of weakness in the labour market. “We expect policymakers to deploy more easing measures to counter the downside risks to growth and inflation,” the bank said.

Key data points:

The headline PMI for March fell to 49.2 from 50.7.

Output fell to 50.8 from 51.7.

New orders fell to 49.3 from 51.2.

Employment fell to 47.0 from 49.8


HSBC said today’s data point is the first in 2015 after the Chinese New Year period so it should be free of distortions related to the timing of the New Year. The picture it paints is one of an economy slowing further from Q4 last year and facing further downward pressure. Moreover, this weakness is now also feeding through not just to prices but is reflected in deteriorating labour market conditions as well. Weak domestic demand was the main reason for the today’s low reading. New orders fell into contraction, while the output sub-index also moderated from the January-February average of 51. This is also in line with the continuing contractions in recent economic activity data including floor space sold and power generation. Re-stocking activities also remain weak, suggesting the outlook remains uncertain. The weak domestic demand is putting downward pressure on the labour market. The employment subindex fell to the lowest point since September 2014. Government officials have already hinted about labour market weakness during the recent NPC meetings. Local media have also reported that fewer migrant workers have come back for the Spring season. In addition, new export orders continued to contract. Together with an appreciating RMB, that will put additional pressures on China’s export in the coming months. Meanwhile, price sub-indices are still in contraction, although the pace of price cuts moderated slightly.

Bottom line:

According to HSBC the flash reading of the March PMI further confirms the problems of weak domestic demand and disinflation remain, and this is also leading to deteriorating labor market conditions. More policy easing is therefore warranted in the coming weeks and months to support growth.

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