China’s Manufacturing May Expand at Slowest Pace in 11 Months, PMI Signals

China’s manufacturing may expand at the slowest pace in 11 months in June, as output growth stalls and export orders drop, a preliminary purchasing managers’ index showed.

The 50.1 level reported by HSBC Holdings Plc. and Markit Economics today compares with a final reading of 51.6 in May. A number above 50 indicates expansion.

China has paused for 11 weeks in raising interest rates, the longest gap since increases began in October, as officials gauge the economy’s strength amid a slowdown in the U.S. and a debt crisis in Europe. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. recovery has been slower than anticipated and Bank of Japan board member Yoshihisa Morimoto said today Greece’s deepening fiscal crisis is contributing to an “uncertain” outlook for global growth.

“Demand is cooling thanks to the effect of tightening measures and the slackness in external markets,” said Qu Hongbin, a Hong Kong-based economist at HSBC. “But hard-landing worries are unwarranted not least because the current PMI is at a level consistent with around 13 percent industrial production growth. The good news is that inflationary pressures started to ease meaningfully in June amid slowing demand.”

The National Development and Reform Commission said yesterday that inflation may accelerate this month and “remain elevated for some months.” The China Securities Journal said in an unsigned front-page editorial today that consumer prices may jump by more than 6 percent this month after climbing 5.5 percent in May, adding pressure for the People’s Bank of China to increase rates again.

Damping Growth

The central bank has raised interest rates four times starting in October and boosted banks’ reserve requirements nine times since November to a record 21.5 percent for the biggest lenders.

China’s benchmark Shanghai Composite Index has tumbled about 13 percent from this year’s April high on concern that higher interest rates will damp growth and hurt company profits. The gauge was 0.4 percent higher at 1:30 p.m. local time.

HSBC’s preliminary manufacturing index, known as 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 companies. The final reading will be published on July 1.

Export Orders Drop

The output gauge showed no expansion in June, with the reading declining to an 11-month low of 50 from 51.6 in May, HSBC said in today’s statement. Growth in new orders moderated and new export orders contracted at a faster pace, while output and input prices climbed at a slower rate.

The index may drop below 50, which would indicate a contraction, at some point in the next three months as a result of the government’s “aggressive” tightening measures, Paul Cavey, a Beijing-based economist with Macquarie Securities Ltd., said.

The HSBC PMI last fell below 50 in July 2010. The official index released by the Federation of Logistics and Purchasing and the National Bureau of Statistics last showed a contraction in February 2009.

“The tightening policies have been successful and the PMI reading confirms a slowdown in growth because manufacturing still accounts for about 50 percent of the economy,” Cavey said. “A contraction would reduce the likelihood of further tightening because growth will become more of a concern than inflation.”

Real-Estate Prices

In a sign manufacturing expansion is easing, passenger-car sales fell for the first time in more than two years in May as the government phased out incentives. Automakers including Honda Motor Co. also cut production due to a shortage of components following Japan’s earthquake.

China’s efforts to cool real-estate prices is damping demand for housing, prompting Standard & Poor’s to cut the outlook on Chinese developers to negative from stable last week. The value of land sales in Beijing this year has dropped 75 percent, the Securities Times reported yesterday, citing data from Centaline Property Agency Ltd.

Still, demand for steel and cement may be sustained by Premier Wen Jiabao’s campaign to start building 10 million low- cost homes this year. Local government financing vehicles will be allowed to sell bonds to fund the construction of such projects, according to a notice on the website of the NDRC’s Anhui province branch on June 16.

--Victoria Ruan. With assistance from Huang Zhe in Beijing. Editors: Nerys Avery, Michael Heath

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at +86-10-6649-7570 vruan1@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.