China’s Manufacturing Growth Slows as Policy Tightens

China’s manufacturing growth slowed for a second month in January after the central bank raised interest rates and as millions of migrant workers returned to their villages before a Lunar New Year holiday.

The Purchasing Managers’ Index fell to 52.9 from 53.9 in December, the China Federation of Logistics and Purchasing said in a statement on its website. That was less than the median estimate of 53.5 in a Bloomberg News survey of 13 economists.

Premier Wen Jiabao aims to sustain growth while intensifying a campaign against real-estate speculation and fighting inflation that may have accelerated last month after storms disrupted food supplies. In today’s data, a rebound in an index of input costs underscored why companies from Baoshan Iron & Steel Co. to Starbucks Corp. have raised prices.

“Intensifying inflation pressure shows the government may need to strengthen policy tightening,” said Isaac Meng, a Beijing-based economist at BNP Paribas SA. He added that the central bank may boost benchmark rates immediately after the holiday, which begins tomorrow and ends Feb. 8.

The yuan strengthened for the first day in four, trading at 6.5920 per dollar as of 10:13 a.m. in Shanghai.

Bank of America Merrill Lynch economist Lu Ting said the data were heavily distorted by the holiday and there are “no big worries on growth.”

Export Orders

Indexes for output, new orders and new export orders fell and a measure of employment slid to 49, the lowest reading since March 2009. The input-price index rose to 69.3 from 66.7 in December as food costs climbed.

In the statement, Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said that companies face “difficulties” as cost pressures intensify and new orders grow at a slower pace.

Domestic demand is stable, a slowdown in industrial output may be “bottoming out,” and inflationary pressure appears to be rebounding, the logistic federation said in a separate statement. Slower growth in production in real-estate related industries such as furniture, textiles, glass and cement requires attention, it said.

The World Bank estimates that China’s economy will expand 8.7 percent this year, three times the pace of the U.S., as developing economies continue to outperform richer nations. China’s expansion was 9.8 percent in the fourth quarter.

Raising Rates

The central bank has raised benchmark interest rates twice since mid-October and pushed banks’ reserve requirements to the highest level in more than two decades to drain money from the financial system. The government also last month expanded measures to cool the real-estate market, including by raising minimum down-payment requirements for second-home purchases.

The PMI is released by the Beijing-based logistics federation and the National Bureau of Statistics and gives an indication of manufacturing activity by surveying more than 820 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

UBS AG estimates that inflation exceeded 5 percent last month after slowing to a 4.6 percent annual pace in December. November’s 5.1 percent inflation rate was the highest in 28 months.

The central bank indicated in a Jan. 30 report that capital inflows and higher labor and resource costs may add to inflation pressures. Tools for reining in liquidity and credit growth include interest rates, bill sales and bank reserve requirements, the People’s Bank of China said.

Policy makers aim to hold growth in M2, the broadest measure of money supply, at about 16 percent this year. Last year, the actual 19.7 percent gain compared with a target of 17 percent. Local-currency lending totaled 7.95 trillion yuan ($1.2 trillion) in 2010, exceeding the government’s 7.5 trillion yuan ceiling.

The latest measures to cool the property market include increasing down-payment requirements for second homes to 60 percent from 50 percent and trials of property taxes in Shanghai and Chongqing.

--Li Yanping, with assistance from Marco Lui, Belinda Cao, Huang Zhe and Jay Wang. Editors: Paul Panckhurst, Ken McCallum.

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or

To contact the editor responsible for this story: Paul Panckhurst at

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