Thursday 21 July 2011

Chinese manufacturing set to contract


China’s manufacturing sector could be headed for its first contraction in a year as new orders drop and factories battle against persistent inflation, according to a survey published on Thursday.
The HSBC flash purchasing managers’ index for China, designed to provide an early snapshot of industrial conditions, has fallen to 48.9 in July, the lowest in 28 months. The final figure for this month will be published on August 1. A reading below 50 would denote a retrenchment in activity.
The weak PMI added to concerns that sustained monetary tightening by the government is weighing on growth, but analysts cautioned against overreacting, saying that the world’s second-largest economy was still poised to perform strongly in the second half.
Qu Hongbin, chief China economist with HSBC, said that “resilience of consumer spending and continued investment in a massive amount of infrastructure projects” would prop up the country’s growth at about 9 per cent over the rest of year. China’s economy expanded 9.6 per cent in the first half, making it the fastest-growing major economy in the world.
Premier Wen Jiabao said last week that the government had to strike a balance between suppressing price pressures and preventing sharp swings in the pace of growth.
Faced with the highest inflation in three years, the central bank has been steadily tightening policy, raising interest rates five times and banks’ reserve requirements nine times in the past nine months.
Even after all those moves, inflation remains a stubborn foe, with the flash PMI pointing to a rebound in input costs in July. But a deepening slowdown in manufacturing growth could compel the government to pause its tightening campaign.
Reflecting concerns about the outlook, the main Chinese stock market index in Shanghai fell 1 per cent on Thursday, its fourth straight day of declines.
China Development Bank, a major state-owned lender, said it had cancelled a bill issuance scheduled for Friday. It did not explain why, but the central bank’s tightening has drained cash from the Chinese money market, leading to under-subscriptions of a series of short-term debt auctions in recent weeks.
Taking a longer-term view, the International Monetary Fund said in its annual report about the Chinese economy that the country remained “on a solid footing”, in part thanks to the employment and wage growth that have fuelled domestic consumption. However, it warned that food-driven inflation, a property bubble and declining credit quality all posed risks.

Source: www.ft.com

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