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August 24, 2012

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China factories slow as index hits 9-month low

China's manufacturing activity fell to a nine-month low in August, a survey showed yesterday, stepping up pressure on the government for more interest rate cuts and stimulus measures to revive growth in the world's second-largest economy.

The HSBC Flash PMI, the earliest available indicator of China's industrial sector, fell to a nine-month low of 47.8 in August from July's final reading of 49.3. A reading under 50 means contraction. The index is slanted more toward private and export-oriented firms.

Qu Hongbin, chief economist for China at HSBC, said falling orders drove the August Flash PMI to a nine-month low.

"It suggests Chinese producers are still struggling with strong global headwinds," Qu said. "China must step up policy-easing to lift infrastructure investment in coming months if it hopes to achieve the stated policy goal of stabilizing growth and the job market."

China's gross domestic product expanded 7.6 percent from a year earlier in the second quarter, the slowest pace in three years, which drew closer to the government target of a minimum 7.5 percent growth for this year.

Zhang Zhiwei, a Nomura economist, said the Flash PMI suggested economic momentum likely remained weak in August. "It indicates that the batch of August economic data may face downside risks as well. Export weakness in July may have continued into August, and the effect of policy stimulus through infrastructure investment may not show up as strongly in the HSBC PMI as in the official PMI," Zhang said.

The official Purchasing Managers' Index, compiled by the China Federation of Logistics and Purchasing, edged down to 50.1 in July from June's 50.2.

Compared with the HSBC PMI, the official one has a higher weight for large, state-owned enterprises. The official PMI, due on September 1, will help to confirm if overall economic momentum indeed weakened, Zhang said.

"If confirmed, it will put more pressure on the central bank to loosen monetary policy by cutting the reserve requirement ratio," Zhang said. "It will also support local governments in their initiatives to promote growth through investment projects."

Last week, Premier Wen Jiabao made an inspection tour in Zhejiang Province, during which he reiterated the difficulties facing the economy and explicitly stated that "lower inflation provides more room for monetary policy easing."

Cities responded: Tianjin on Tuesday set a four-year target of 1.5 trillion yuan (US$236 billion) for industrial investment, after similar moves by Chongqing; Ningbo, Zhejiang Province, and Hunan's provincial capital, Changsha.

Zhou Hao, an economist at Australia and New Zealand Banking Group Ltd, said an imminent monetary policy easing and faster implementation will help China's economy gradually regain momentum. He also expected the central bank to cut the reserve requirement ratio this month to enrich liquidity in the banking system.


 

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