China Manufacturing Grows at Slowest Pace in Nine Months on Cooling Effort

China’s manufacturing expanded at the slowest pace in nine months in May as the government extended a campaign to cool inflation and the property market, a survey of companies indicated.

The Purchasing Managers’ Index was at 52 from 52.9 in April, the China Federation of Logistics and Purchasing said in an e-mailed statement. The number was higher than the median forecast of 51.6 in a Bloomberg News survey of 16 economists. The index has a seasonal pattern of falling in May, economists said before the release.

Premier Wen Jiabao has yet to tame prices in the fastest-growing major economy as food and housing costs climb, McDonald’s Corp. charges more for soft drinks, and a drought in Yangtze River areas threatens grain production. Today’s data suggested moderating economic growth may aid his campaign, with input-price inflation easing as manufacturers’ orders and output grew at a slower pace.

“The data suggests continued moderation in industrial activities,” said Li Wei, a Shanghai-based economist at Standard Chartered Bank. At the same time, the reading was strong enough to alleviate “fears of a sharp slowdown, and thus marginally increases the chance of a further rate hike in the near term,” Li said.

The nation’s fifth interest-rate increase since mid- October may come as early as this weekend, which is extended by a holiday on Monday, the economist added.

More Evidence

A separate PMI released today indicated the weakest manufacturing growth in 10 months. That index, released by HSBC Holdings Plc and Markit Economics, is based on a survey of more than 400 companies, while the data released jointly by the logistics federation and the statistics bureau covers more than 800.

The Shanghai Composite Index has fallen more than 10 percent from this year’s high in April, and analysts have pared economic growth forecasts as monetary tightening starts to bite. The benchmark slid another 0.5 percent as of 11:06 a.m. local time, while the yuan was little changed at about 6.48 per dollar.

Slower expansions in the Asia Pacific region may fuel concern that growth will falter in a global economy already hampered by Japan’s disaster and Europe’s debt crisis.

India, Australia

India’s expansion cooled in the first quarter even as inflation pressures persisted, a government report showed yesterday. Australia's economy shrank by the most in 20 years because of natural disasters, a statistics bureau report showed today.

Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said he saw an increased possibility that China’s economic growth will moderate, adding that destocking by companies may be a factor. In a statement, the logistics federation said that inflation pressures from commodity costs are easing.

China’s economy expanded 9.7 percent in the first quarter from a year earlier, while consumer prices exceeded the government’s 4 percent target in each of the first four months of this year. Nomura Holdings Inc. has trimmed its 2011 growth forecast to 9.4 percent from a previous estimate of 9.8 percent, after cuts by Goldman Sachs Group Inc. and JPMorgan Chase & Co.

‘Excessive Downturn’

The nation risks an “excessive downturn” if tightening measures last too long, Ba Shusong, a researcher at the State Council’s Development Research Center, said in a commentary published May 24. Non-deliverable yuan forwards fell in May by the most since November on speculation that a weaker economic expansion will encourage officials to slow the pace of the currency’s appreciation against the dollar.

Signs that the economy is cooling include weaker gains in industrial production. Car sales slipped in April and power shortages may also trim the nation’s expansion. The government is raising electricity prices for businesses and farmers in 15 provinces starting today, giving an incentive for generating companies to bring more supply online.

Auto sales may fall 10 percent this year with the end of government stimulus policies and restrictions on car licenses, according to the China Automotive Technology & Research Center. BYD Co., the Chinese carmaker backed by Warren Buffett, had an 11 percent drop in April sales, it said last month.

‘Seasonal Decline’

Capital Economics Ltd. analysts said before today’s statement that the manufacturing index has a “strong seasonal pattern” of declining in May each year.

“Given current growth concerns, there is a risk of market overreaction to what may be a normal seasonal decline,” London-based economist Mark Williams said in a note yesterday. “Our view remains that the ongoing economic slowdown is gentle and highly unlikely to lead to a hard landing.”

Inflation was 5.3 percent in April, down from an almost three-year high of 5.4 percent in March. Societe Generale SA says the annual rate may peak this month at about 6.5 percent.

A slowing in food-price inflation “seems to have reversed somewhat recently,” JPMorgan Chase & Co analysts said in a May 30 note. The price of pork, a Chinese staple, rose 35 percent in April from a year earlier and food costs may be pushed higher if a drought in the Yangtze River area persists, the note said.

Premier Wen said May 1 that the government is determined to bring home prices to a “reasonable” level in cities where gains have been excessive. Besides boosting key interest rates, officials have ratcheted up lenders’ reserve requirements and imposed limits on home purchases.

--Zheng Lifei, with assistance from Huang Zhe and Sophie Leung. Editors: Paul Panckhurst, Sunil Jagtiani.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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