China’s Manufacturing May Contract for First Time in a Year, PMI Signals

China’s manufacturing may contract for the first time in a year as output and new orders drop, preliminary data for a purchasing managers’ index indicated.

The gauge fell to 48.9 for July from a final reading of 50.1 for June, HSBC Holdings Plc and Markit Economics said in a statement today. The final July reading is due Aug. 1.

Today’s data adds to evidence that growth in the world’s second-largest economy is slowing on Premier Wen Jiabao’s campaign to tame consumer and property prices. The International Monetary Fund said in a report released late yesterday in Washington that risks for the economy include the threat of faster-than-expected inflation, a real-estate bubble, and bad loans from stimulus spending.

“The data are another sign that the monetary tightening measures that commenced last October are biting,” said Tim Condon, the Singapore-based head of Asia research at ING Groep NV. “If there is a concern that growth is slowing too much, past practice is that there will be a pause in the tightening.”

Stocks in China fell for a fourth day. The benchmark Shanghai Composite Index closed 1 percent lower at 2,765.89, the biggest decline since July 12.

The yuan rose to a 17-year high after the central bank set the strongest reference rate since a dollar peg was scrapped exactly six years ago. It was 0.12 percent stronger at 6.4516 per dollar at 3:28 p.m. in Shanghai, the biggest advance in a week, according to the China Foreign Exchange Trade System.

Photographer: Nelson Ching/Bloomberg

A security guard stands watch outside a public housing project in Beijing, China. Gross domestic product grew 9.5 percent in the second quarter from a year earlier and state plans to build 10 million low-cost homes this year may sustain growth. Close

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Photographer: Nelson Ching/Bloomberg

A security guard stands watch outside a public housing project in Beijing, China. Gross domestic product grew 9.5 percent in the second quarter from a year earlier and state plans to build 10 million low-cost homes this year may sustain growth.

Cost Pressure

Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch, said the HSBC survey may be “more downward- biased” than an official PMI because the average size of the businesses covered is smaller. Such companies “are under increasing pressure” from labor costs and to secure capital, Lu said. He advised investors to “not overly respond” to the data.

The government has raised interest rates five times since mid-October, boosted lenders’ reserve requirements to a record level and imposed curbs on property investment and home purchases.

Inflation, which has breached the government’s 2011 target of 4 percent every month this year, accelerated to 6.4 percent in June from a year earlier, the highest level in three years.

The IMF said in the report that China’s economy “remains on a solid footing, propelled by vigorous domestic and external demand.” The Washington-based lender’s 24 directors also “generally agreed” that a stronger yuan would help rebalance the China’s economy toward domestic demand.

Slowing Demand

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. Output in July contracted at a faster rate, export orders shrank at a slower pace and the gauge of new orders dropped below 50, the dividing line between expansion and contraction, today’s data showed.

Manufacturing in some industries is being hit by slowing demand. Li Ning Co., China’s largest sportswear maker and retailer, said July 7 its first-half sales dropped by about 5 percent. The China Association of Automobile Manufacturers said July 8 that vehicle sales may increase about 5 percent this year, compared with an earlier estimate for 10 percent to 15 percent growth, due to lower demand for commercial autos.

The preliminary number has matched the final reading twice since HSBC began publishing the series in February. If it’s confirmed on Aug. 1, the index will have dropped to its lowest level since March 2009. It last fell below 50 in July 2010.

Economists at Societe Generale SA and Barclays Capital say that seasonal factors may have contributed to the contraction in the preliminary reading, as manufacturing tends to slow in the summer. The index declined in June and July 2010 before rebounding in August.

Testing Threshold

The official manufacturing PMI, released by the National Bureau of Statistics and the China Federation of Logistics and Purchasing, last showed a contraction in February 2009. The July reading of the index, which covers more than 800 companies in 20 industries, is due to be released on Aug. 1.

Yao Wei, a Hong Kong-based economist with Societe Generale estimates the federation’s index will decline to 50 from 50.9 in June and rebound in August. Barclays Capital economist Chang Jian also forecasts a drop “possibly testing the 50 threshold,” with a gradual recovery in the third quarter.

Today’s data “implies that June’s rebound in industrial production was just temporary,” Qu Hongbin, chief China economist at HSBC in Hong Kong, said in a statement. “We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through.”

‘More Complicated’ Situation

Industrial output climbed 15.1 percent in June from a year earlier, the fastest pace since May 2010. Gross domestic product climbed 9.5 percent in the second quarter from a year earlier, slowing from 9.7 percent in the first quarter.

China’s companies will face a “more complicated” situation in the second half of this year from rising raw material, energy and labor costs, the Ministry of Industry and Information Technology said today. Still, output growth of 13 to 15 percent is “possible and reasonable” for the rest of the year, ministry spokesman Zhu Hongren said at a briefing in Beijing.

--Zheng Lifei. With assistance from Jing Jin in Shanghai, and Huang Zhe, Victoria Ruan in Beijing. Editors: Nerys Avery, Ken McCallum

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 in Hong Kong at ppanckhurst@bloomberg.net

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