China layoffs mounting as factory output shrinks | Business| Economy and finance news from a German perspective | DW | 01.03.2016
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China layoffs mounting as factory output shrinks

China's manufacturing activity has shrunk for the seventh straight month, with companies shedding workers at an ever-faster pace. Beijing is now even planning to lay off millions of workers in its "zombie enterprises."

China's official Purchasing Managers' Index (PMI) fell to 49.0 points in February from January's reading of 49.4 points - the lowest reading since November 2011, and significantly below the 50-point mark that separates growth from contraction.

The fall was sharper than predicted by economists who had expected only a slight dip to 49.3 points in a poll by the news agency Reuters.

The private Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI), which focuses more on small to medium-sized private firms, showed activity contracted for a 12th straight month, falling to 48.0 points from 48.4 points in January.

Both surveys showed conditions in China's job market were continuing to deteriorate, with the Caixin report noting that companies shed jobs at the fastest pace since January 2009, when China was reeling from a near-collapse in global trade following the financial crisis.

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China troubled by overcapacity

Job cuts in 'zombie enterprises'

Job losses are bad news for China's Communist rulers ahead of next week's annual session of parliament. The government is trying to change the country's economic model, shifting away from growth based on investment and exports towards greater reliance on domestic consumption.

On Monday, Yin Weimin, the minister for human resources and social security, said China was aiming to make 1.8 million workers in the coal and steel industries redundant. And on Tuesday, Reuters reported that Beijing plans to lay off at least another 5 million workers.

Citing two sources with ties to the country's leadership, Reuters said that Beijing plans to shed 5 to 6 million workers from "zombie enterprises," or companies that have shut down operations but keep staff on payrolls as local government officials worry about the social and economic impact of bankruptcies and unemployment.

The closures would happen over the next two to three years as part of efforts to curb industrial overcapacity and pollution. The move would be the boldest retrenchment program in almost two decades, one of the sources said.

Shutting down "zombie firms" has been identified as one of the government's priorities this year, with China's Premier Li Keqiang promising in December that they would soon "go under the knife."

Damp squib

China's mounting job and growth problems are likely to dash hopes that stimulus measures introduced in the last year will start to produce signs of economic stabilization anytime soon.

Just on Monday, the People's Bank of China (PBOC) announced it was cutting the amount of cash that banks must hold as reserves for the fifth time since February 2015. The move is designed to release an estimated $100 billion of long-term cash into the bank system, in hopes it will flow through to the wider economy.

However, China's factory sector has been under pressure from weak demand at home and abroad and massive overcapacity in key industries such as steel and coal, diluting the impact of six central bank interest rate cuts and a spate of other support measures since November 2014. Both surveys on Tuesday showed further contractions in domestic and export orders.

In addition, some manufacturers in capital-intensive sectors are struggling with heavy debt loads, which are becoming increasingly difficult to repay as they have to constantly cut prices to win sales.

China's economic growth cooled to 6.9 percent in 2015, the slowest pace in 25 years, and economists see it slowing further to around 6.5 percent this year. Some market watchers believe it is already much weaker than official data suggests.

uhe/cjc (Reuters, dpa, AFP)

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