(File photo)

Manufacturing activity falls to 40-month low

Analysts on Monday suggested that further monetary easing could come soon, with the latest official PMI data falling to a 40-month low, indicating the difficulties being faced by the nation's manufacturing industry.

The official manufacturing Purchasing Managers' Index (PMI), a closely watched gauge of the country's factory activity, fell to 49.4 percent for January, according to data released Monday by the National Bureau of Statistics (NBS).

A PMI reading above 50 percent suggests an expansion in factory activity, while a reading below that level points to a contraction.

January's PMI remained in negative territory for the sixth consecutive month and was also at the lowest level since August 2012.

The PMI reading also missed an earlier forecast of 49.6 by economists polled by Reuters and was 0.3 percentage points down from December 2015.

Seasonal factors might have affected factory activity last month, but the weak performance points to serious problems in the nation's manufacturing sector, Liu Dongliang, an analyst at China Merchants Bank, was quoted as saying in a note sent to the Global Times on Monday.

PMI data is usually low in January and February before the weeklong Spring Festival holidays, which start on February 8 this year, Liu noted.

"What's worth noting is that, even without considering the seasonal factors, it's the weakest PMI reading for January since 2009, [showing that] manufacturing is only slightly stronger now than it was during the financial crisis," said Liu.

Meanwhile, there are no signs that the slowdown in the world's second-largest economy has come to an end, and key economic indexes could continue to slide, as the country is poised to take robust measures to reduce overcapacity, Liu noted.

Monetary easing imminent

Given such a dim outlook, further monetary easing measures, such as lowering banks' reserve requirement ratio (RRR), are "just a matter of time," Liu said. It is necessary for the People's Bank of China (PBC), the country's central bank, to consider such measures, and it may also have to cut interest rates, according to Liu.

Given the pressure from capital outflows, RRR cuts would be a better option than interest rate cuts for now, Liu said in the note, noting that flexible exchange rate policies might also be needed to allow market-driven fluctuations.

"Making it clear that monetary easing has not been phased out would be conducive to improving market expectations and confidence in the real economy," Liu said.

Adding to the gloom on Monday was even weaker PMI data reported by Caixin Insight Group and Markit.

The Caixin PMI, which tracks smaller companies than the official index, was at 48.4 for January. The reading was up 0.2 points from the month before but still indicated contraction for the 11th straight month, according to a Caixin report on Monday.

The Caixin PMI data could also increase the prospects of the PBC announcing easing measures in the near future, analysts said.

Services still growing

The January PMI data offered further evidence of the divergence in China's economic growth, with services expanding as manufacturing continued to decline.

The official non-manufacturing PMI, which primarily tracks the services sector and construction activity, remained in positive territory in January, even though it fell by 0.9 percentage points to 53.5 percent, according to the NBS.

The contraction in manufacturing activity could drag on the non-manufacturing sectors and slow their expansion, according to analysts at the Financial Research Center at Bank of Communications.

Non-manufacturing sectors will probably maintain stable growth as the central government will push forward favorable fiscal policies to support the services sector, the analysts said in a note sent to the Global Times on Monday.