China's manufacturing growth stalled for the second straight month in January and companies had to cut prices at a faster clip to win new business, adding to worries about growing deflationary pressures in the economy, a private survey showed.

The HSBC/Markit Flash Manufacturing Purchasing Managers' Index (PMI) hovered at 49.8 in January, little changed from December's 49.6 and just below the 50-point mark that separates contraction from growth on a monthly basis.

A Reuters poll had forecast a second month of contraction with a reading of 49.6.

Reflecting the tumble in oil prices, which have more than halved in the last six months, a sub-index for input prices sank to 39.9, a level not seen since the global financial crisis.

But companies also had to cut output prices for the sixth straight month to sell their products, and more deeply than in December, eroding their profit margins.

"Today's data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand," Qu Hongbin, a HSBC economist in Hong Kong said on Friday.

"More monetary and fiscal easing measures will be needed to support growth in the coming months."

Falling prices are a concern for China, which wants to avoid Japan's fate of sinking into a 20-year deflationary funk that has depressed consumption and economic growth.

The survey showed final demand for China's factory goods rose this month, but only modestly as the sub-indices for new orders and new export orders stood close to the 50-point threshold.

Factories laid off staff for the 15th consecutive month in January in the face of tepid demand, the PMI showed.

DEFLATION SETTING IN?

There are already some signs of stubborn deflationary pressure in China.

Producer prices have fallen for almost three straight years. That helped to drag China's annual consumer inflation to a near five-year low of 1.5 percent in December.

To contain deflationary risks, economists at state think-tanks who are privy to China's policy discussions said authorities are ready to cut interest rates further and pressure banks to step up lending. The central bank unexpectedly cut rates in November for the first time in more than two years.

Some Chinese consumers are already postponing purchases in anticipation that prices will fall further in the future, a classic warning sign of deflation that would deal another blow to the Chinese economy, where growth hit a 24-year-low of 7.4 percent last year.

Although 2014 economic growth data was not as bad as some had feared, it suggested that a steady series of policy easing had not sustained activity as much as policymakers had hoped.

In a sign of the times, separate data on Friday showed the bad debt ratio at Chinese banks climbed to a five-year high of 1.64 percent at the end of 2014 as companies struggled to repay their loans in the dour business climate.

Indeed, Sany Heavy Equipment International Holdings Co Ltd said on Friday its 2014 net profit could more than halve after falling coal prices dented demand for coal machinery.

That followed a more dire forecast from Zoomlion Heavy Industry Science and Technology Co Ltd, another heavy equipment maker, which said on Monday that its 2014 net profit may have plunged 80 percent. The profit warning was its fifth in 21 months.

"Right now, I'm more worried about investment," said Chang Chun Hua, an economist at Nomura in Hong Kong. "The financing cost of investment is getting higher with deflation. Real interest rates are going up."

Economists polled by Reuters expect the economy to slow further this year to around 7 percent, even with additional stimulus measures. A cooling property market, high financing costs and heavy corporate and local government debt loads will likely continue to drag on activity.

Chinese Premier Li Keqiang acknowledged on Wednesday that the world's second-largest economy will face downward pressures in 2015 but said it was not heading for a hard landing.

RMB against USD close to limit down devaluation of Chinese Yuan largest drop since Nov 2008

The Chinese yuan traded lower against the U.S. dollar in late Asian deals on Monday.

The yuan fell to 6.2572 against the greenback, its lowest since June, 2014. The next possible downside target for the yuan is seen around the 6.3 zone. The pair was worth 6.2283 at Friday's close.

The People's bank of China set the central parity rate for the yuan at 6.1384 per dollar, weaker than the Friday's reference rate of 6.1342. The Chinese central bank set the central parity rate every morning and allows the currency to fluctuate upto 2 percent from that level.
China’s yuan posted the biggest two-day loss since 2008 and sank to a record discount to the central bank’s reference rate, nearing the limit of its trading band.

The spot rate traded as much as 1.89 percent weaker than the People’s Bank of China’s fixing against the dollar and a move to the 2 percent threshold would under the current system require policy makers to do one of three things: intervene to support the yuan, cut the reference rate or widen the band. Volatility is surging as the PBOC gives markets a greater role in determining the exchange rate at a time when monetary easing in Europe and Japan are bolstering demand for the greenback.

The yuan slid 0.41 percent to close at 6.2542 a dollar in Shanghai, after dropping 0.31 percent on Friday, according to prices from China Foreign Exchange Trade System. Against the euro, the yuan rose as much as 1.4 percent to a 13-year high of 6.9685 after a weekend election in Greece boosted the possibility of the country leaving the 19-nation currency.

“Haven demand for the dollar is strong with the uncertainty in Greece and Europe’s monetary easing,” said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment Consultancy Ltd. “It’s going to be some hard times for the yuan as China will keep monetary policy relatively loose to ensure economic growth, which means more supply of the local currency.”

The Bloomberg Dollar Spot Index jumped to the highest since at least 2005 and the euro slumped to an 11-year low against the U.S. currency. The European Central Bank announced last week a bond-buying program that PBOC Deputy Governor Pan Gongsheng said Friday was adding to yuan depreciation pressure.


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