Tags: China | Manufacturing | Slow | Tightening | Steps | PMI

China Manufacturing May Slow on Tightening Steps, PMI Shows

Monday, 23 May 2011 11:34 AM

A Chinese manufacturing index fell to its lowest level in 10 months, adding to signs that economic growth is cooling after the government raised interest rates and curbed lending to rein in inflation.

The preliminary purchasing managers’ index compiled by HSBC Holdings Plc and Markit Economics dropped to 51.1 in May from a final reading of 51.8 in April. A number above 50 indicates expansion.

Stocks in China extended declines after the report, with the benchmark index dropping to its lowest since February, on concern the government’s measures to tame inflation will damp growth and corporate earnings. Vice Premier Wang Qishan reiterated this month that the government’s top priority is to control price increases.

The data “confirms growth is slowing, which will likely dampen price pressures and limit scope for monetary tightening,” said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

The benchmark Shanghai Composite Index fell 1.9 percent to 2,803.15 at the 11:30 a.m. local-time break, heading for the third straight daily decline. The yuan declined 0.08 percent to 6.4976 per dollar at 12:09 p.m.

HSBC’s preliminary manufacturing index, called the Flash PMI, is based on 85 percent to 90 percent of the total responses to its monthly purchasing managers’ survey sent to executives in more than 400 manufacturing companies.

Domestic Tightening

New export orders contracted in May and stocks of purchases and finished goods fell at a faster rate, HSBC said. An output gauge declined to a 10-month low, although it remained above the 50 level that divides expansion from contraction, the bank said.

The preliminary reading is “well below the series’ long-term average of 52.3,” Qu Hongbin, a Hong Kong-based economist at HSBC, said. Domestic tightening and disruptions to supplies caused by the earthquake, tsunami and nuclear crisis in Japan likely affected manufacturing, he said.

The People’s Bank of China has raised borrowing costs four times since mid-October and curbed lending by raising banks’ reserve requirements to rein in inflation that’s exceeded the government’s 2011 target of 4 percent every month this year.

The central bank is focused on containing inflation and will “control the monetary conditions behind excessively rapid gains in prices,” Governor Zhou Xiaochuan said in the PBOC’s annual report released May 17.

Beijing’s Priority

“Price stability will continue to outweigh growth as Beijing’s top priority in the coming months,” especially as inflation may accelerate until mid-year, HSBC’s Qu said. “Current tightening measures must be kept in place for a while longer to manage inflationary expectations.”

Industrial output growth weakened last month and the worst power shortage in seven years is hurting production at some factories as provinces start curtailing electricity supplies.

Many companies in the eastern province of Zhejiang, a manufacturing hub, are using diesel generators because of rationing, state-run China Petrochemical Corp., the country’s biggest fuel supplier, said on May 17.

The shortages may depress the nation’s economic growth by 0.4 percentage point this year, Industrial Securities Co. said in a May 20 report.

Fixed asset investment expanded 25.4 percent in the first four months of the year and exports jumped 29.9 percent last month, both exceeding analysts’ estimates, factors that may help support growth.

Tame Inflation

“Cooling growth is not all bad news as it also helps to tame inflation,” Qu said. The preliminary index’s input price gauge was at its lowest level since August 2010 and growth in output prices eased to 54.6 in May from 55.2 in April, he said.

The economy won’t experience a “hard landing” and any slowdown is “controllable,” Fan Jianping, director of economic forecasting at the State Information Center, a research institute affiliated with the National Development and Reform Commission, said at a Shanghai conference on May 19. He estimated growth will moderate to 9.5 percent this year from 10.3 percent in 2010.

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A Chinese manufacturing index fell to its lowest level in 10 months, adding to signs that economic growth is cooling after the government raised interest rates and curbed lending to rein in inflation. The preliminary purchasing managers index compiled by HSBC Holdings Plc...
Monday, 23 May 2011 11:34 AM
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