Tags: China | Factory | Output | Growth | 28-Month Low

China Factory Output Growth Hits 28-Month Low

Friday, 01 July 2011 07:35 AM

China's factory sectory grew at its slowest pace in 28 months in June as new orders expanded less quickly, with weaker global demand and tight monetary policy at home pinching production.

Although the moderation in activity did not point to a sharp drop-off in Chinese economic growth for now, the data was slightly worse than forecast and led some analysts to predict China may be less aggressive in tightening monetary policy conditions later this year.

Some market watchers said Beijing could even take selective steps to tackle pressing bottlenecks, such as freeing up more credit to cash-strapped firms.

"This will further depress markets which have been increasingly worried about a hard landing in China," said Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong, while arguing that China was more likely facing a soft landing.

"Some policymakers might be more concerned about over-tightening and might consider slightly adjusting their policy stance," he said. For example, he added, some additional increases in banks' reserve ratios (RRR) that have been expected may be put on hold.

The official purchasing managers' index (PMI), designed to provide a snapshot of conditions in China's vast manufacturing sector, fell to 50.9 in June, below expectations for a reading of 51.3 and down from 52 in May, the China Federation of Logistics and Purchasing said on Friday.

The 50-point level demarcates expansion from contractions.

A separate PMI survey by HSBC showed growth in overall factory production came close to stalling in June, confirming preliminary findings released last week. Its PMI reading stood at 50.1, with output falling for the first time since July 2010 amid lackluster demand and power shortages.

With the U.S. economy sputtering and Europe fighting a debt crisis, global investors are especially sensitive to any wobble in activity in China, a bastion of fast growth.

London copper prices fell about 0.6 percent in Asian trade on Friday after the China data, but Asian stock markets were higher, hoping that an unexpectedly strong pick-up in business activity in the U.S. Midwest signaled its economy was powering through its recent soft patch.

In a sign that China is not insulated from the troubles of its major trade partners, the official sub-index for new export orders in the PMI fell to 50.5 in June from 51.1 in May, reflecting persistent weakness in global demand. Backlogs of orders shrank for a second straight month.

U.S. retailers are planning conservatively for the upcoming holiday season, trying to avoid being stuck with a pile of unsold goods as they were last season, retail executives told a Reuters consumer summit last week. 


The official PMI showed new orders and exports orders were still growing, though at a much slower pace than May, while the HSBC PMI indicated new export orders fell for a second straight month.

Chen Xingdong, an economist at BNP Paribas, said the current trend in PMI suggests that China's overall economic growth could be dipping towards 8 percent, a level that is likely too low for the government to stomach as it may not create enough new jobs.

As such, Chen said he expects Beijing to "modify" China's tight monetary conditions by giving small- and medium-sized enterprises more access to cash.

He noted the Beijing is already trying to loosen credit controls a touch by allowing the finance ministry to sell bonds on behalf of a handful of local governments to support the building of government-subsidized homes.

"If growth decelerates and you don't stop it, it would be like a ball rolling off a slope and its speed would pick up," he said.

But Dongming Xie, an economist at OCBC Bank in Singapore, noted inflation remained a more immediate worry for Beijing.

"I think it is too early to talk about loosening policy based on the current growth number as inflation is still a concern in the near term," Xie said.

"Economic growth is slowing, but only at a moderate pace."


The People's Bank of China, keen to put a lid on price rises, has lifted the reserve requirement ratio for banks nine times and raised interest rates four times since October.

Inflation raced to 34-month highs of 5.5 percent in the year to May, and is expected to quicken further to 6 percent in June or July.

But as China's economic growth eases slightly, leading indicators suggest price pressures may be moderating, too.

The official PMI showed factory input prices continued to rise sharply in June, albeit at a slower rate than in May, though cooling demand may prevent manufacturers from passing all of those price rises through to consumers in the near term.

Still, not all economists were convinced Beijing is ready to relax policy just yet since it is perennially worried that high prices could stir social unrest and threaten its leadership.

Official rhetoric from Beijing suggests its focus is still very much on taming price pressures.

Earlier this week, Premier Wen Jiabao signaled for the first time that China would struggle to meet its 4 percent 2011 inflation target, underlining expectations that interest rates will rise further even as economic growth slows.

"The government can claim some progress with inflation, but China is also enjoying the pull-back in global commodity prices," said David Cohen, an economist at Action Economics.

"I think they like to take it gradually on policy, and we can still look for a couple more interest rate hikes before the end of the year."

© 2019 Thomson/Reuters. All rights reserved.

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China's factory sectory grew at its slowest pace in 28 months in June as new orders expanded less quickly, with weaker global demand and tight monetary policy at home pinching production. Although the moderation in activity did not point to a sharp drop-off in Chinese...
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Friday, 01 July 2011 07:35 AM
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