BW Communities

China Factory Sector Close To Stalling

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[China's factory sector barely expanded in June even as price pressures eased, a purchasing managers' survey showed on Thursday, reflecting the impact of monetary policy tightening and slack global demand. The flash HSBC PMI, the earliest available indicator of China's industrial activity, eased to 50.1 in June, the lowest since July 2010. A sub-index for new orders also dropped to its lowest since July 2010, showing marginal growth. The flash PMI reading was just a whisker above the 50-point level that demarcates expansion from contraction and compares with the final reading of 51.6 in HSBC's PMI for May. "It certainly was not a great number," said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, who added the data was symptomatic of a further slowing of China's economic activity. "It fits with the broader picture of weakness not just in the developed world but also in the emerging world as well." Still, analysts said the slowdown in China was orderly and acceptable to authorities, leaving them on course to focus on policy tightening to combat stubbornly high inflation. Financial markets showed a muted reaction to the data. The Australian dollar eased modestly against the US dollar on concern Australia's major trading partner was losing steam. For markets more broadly, the latest sign of a slowdown in the world's second-biggest economy provided another reason for investors -- already worried by the risk of a Greek debt default and weakening growth in the United States -- to be cautious. "Demand is cooling thanks to the effect of tightening measures and the slackness in external markets," said Qu Hongbin, chief China economist at HSBC. Qu said worries about a hard landing for the Chinese economy were "unwarranted" because industrial production is still growing at around 13 percent year on year. "The good news is that inflationary pressures started to ease meaningfully in June amid slowing demand," he noted. Official data for May showed China's factory output is growing at a healthy annual pace of around 13 per cent, well above a 10 per cent threshold that suggests a hard landing is at hand, while the fairly reasonable pace of expansion in imports showed domestic demand had not slowed drastically. The flash PMI showed China's sub-index of factory input prices fell sharply to 52.1 in June from 60.1 in May. That shows prices pressures are increasing, but at a much weaker pace than in May. China's headline consumer inflation hit a 34-month-high of 5.5 per cent in May and many analysts forecast it could peak in June or July at about 6 per cent, which they say means the central bank will tighten monetary conditions further. Uneasy with stubbornly-high inflation, China's central bank signalled last week that taming price pressures remained its top policy priority, effectively brushing aside investor concerns of a sharp slowdown in the economy. It lifted the reserve requirement ratio for banks last week for the ninth time since October to a record high of 21.5 percent. The central bank has launched a series of tightening measures this year, including increasing interest rates. The expansion in money supply slowed to a 30-month low in May while bank lending fell, indicating that tightening was taking effect. A Reuters poll issued on June 16 showed economists expect China to raise bank reserve ratios twice more this year and lending rates just once more before pausing. "I do see a reason behind the weak reading as the effects of China's monetary policy tightening," said Xu Biao, an economist at China Merchants Bank in Shenzhen. Xu said industrial output growth is slowing down as small firms and some big borrowers feel the pinch of tighter credit conditions and also power supply restrictions. "But it is a modest slowdown," said Qiu Yunbo, an economist at China Post Securities in Beijing. "China's industrial production growth will not fall to a single-digit rate." The flash PMI is designed to provide a preview of the final data, which is due on July 1 along with the official PMI. The flash PMI, compiled by British research firm Markit, is based on up to 90 percent of total responses to a monthly survey and is designed to be a snapshot of the final data, usually released on the first working day of the month. This is the fifth month that HSBC has published a flash PMI for China. In May, the flash reading was 51.1, slightly weaker than the final reading of 51.6. Weaker global demand growth has weighed on China's huge exports sector this year. Annual exports growth in May of 19.4 percent was much slower than 29.9 percent in April, although healthy import figures suggested the domestic economy remained healthy. Possibly the biggest threat to global growth this year is posed by the mounting debt woes in Europe and concern Greece is heading for a debt default, a factor acknowledged by the U.S. Federal Reserve on Wednesday. The U.S. central bank cut its growth forecast for the United States but maintained its view that the country's recovery would gradually pick up later this year. However, Chairman Ben Bernanke conceded that the U.S. economic outlook would be partly hostage to events in Europe, reflecting the uncertainty that can affect demand for China's exports. "If there were a failure to resolve that (Greek debt) situation, it would pose threats to the European financial system, the global financial system, and to European political unity," Bernanke said. (Reuters)