Chinese Manufacturing Index Near 29-Month Low Signals Limits on Tightening

A Chinese manufacturing index stayed near the borderline between expansion and contraction in August, signaling limits for more monetary tightening.

The Purchasing Managers’ Index was at 50.9, from the 29- month low of 50.7 in July, the China Federation of Logistics and Purchasing said in a statement today. A separate measure released by HSBC Holdings Plc contracted for the second month.

Premier Wen Jiabao signaled yesterday that a faltering global recovery and turbulence in financial markets have yet to convince the government to switch from a focus on taming inflation. In the latest tightening, the central bank will expand banks’ reserve requirements, starting from Sept. 5.

“The economy is heading towards a soft landing but uncertainties are looming, which means policy makers may not want to tighten monetary policy further,” said Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch. “Fiscal policy may be more proactive to support areas such as small and medium-sized enterprises.”

Stocks in China fell, erasing gains made after the data were released. The benchmark Shanghai Composite Index was 0.2 percent lower at 2,562.52 at the 11:30 a.m. local-time break. China’s interest-rate swaps fell, snapping a five-day advance, on speculation policy makers will refrain from more monetary steps to tame inflation.

The manufacturing index from the logistics federation is based on a survey of purchasing managers in more than 820 companies in 20 industries. The August reading compared with the median estimate of 51 in a Bloomberg News survey of 14 economists. A reading above 50 indicates an expansion.

‘Moderate’ Slowdown

An output index rose for the first time in five months while a measure of new orders expanded at the same pace as in July, the federation said.

The purchasing managers’ index released by HSBC and Markit Economics, based on a survey of more than 400 companies, was 49.9 in August compared with 49.3 the previous month, the companies said in an e-mailed statement today. July’s reading was the lowest since March 2009.

“These data confirm our view that China will only see growth moderation in the coming months, rather than a hard landing,” Qu Hongbin, chief China economist at HSBC in Hong Kong, said in the statement.

The gauge of export orders in the federation’s index contracted for the first time in more than two years, dropping to the lowest since March 2009, while the same measure in the HSBC index was below 50 for the fourth month.

Sovereign-Debt Crisis

“Exports are facing challenges,” the National Bureau of Statistics said in a commentary on the PMI posted on its website. “The increase in commodity prices, the sovereign-debt crisis in developed countries, sluggish external demand and other uncertain elements have led to a drop in manufacturers’ overseas orders.”

Credit Suisse AG economists today cut their growth estimates for Asian economies including China, saying the region is “highly susceptible” to developments in the U.S. and Europe. The Zurich-based lender now expects China to expand 8.6 percent this year and 8.2 percent in 2012, compared with previous forecasts of 8.7 percent and 8.5 percent.

The bank joins UBS AG, Morgan Stanley and Deutsche Bank AG in reducing their estimates for China’s growth last month.

Five increases in interest rates since October, limits on home purchases and lending curbs that included raising banks’ reserve requirements to a record are slowing domestic demand in Asia’s fastest-growing economy.

‘Reasonable’ Slowdown

Angang Steel Co., the largest Hong Kong-traded Chinese steelmaker by market value, said last week first-half profit tumbled 91 percent because of slowing demand from automakers and higher raw material costs. Shares in Geely Automobile Holdings Co., whose parent owns Volvo Cars, fell to their lowest in almost two years in Hong Kong trading on Aug. 22 after saying demand for vehicles in China is showing signs of slowing.

The slowdown in the economy is “reasonable” and within government expectations, according an article Premier Wen wrote in Qiushi, the magazine of the ruling Communist Party.

“Chinese growth is now mainly driven by China’s own domestic demand, rising consumption and strong investment,” Liu Li-gang, head of China research at Australia & New Zealand Banking Group Ltd., said in an interview on Bloomberg Television today. The economy “remains quite resilient amid the global financial turmoil.”

The measure of input prices in the federation’s index climbed for the first time in six months in August, indicating cost pressures on companies continue to rise, Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said in the CFLP statement.

Difficult Balance

Wen yesterday reiterated the government’s determination to cap gains in consumer prices, saying the factors driving inflation haven’t been “fundamentally eliminated.”

“Policy makers are still facing the difficult balance between growth and inflation,” said Shen Jianguang, chief economist for Greater China at Mizuho Securities Asia Ltd. Today’s data “indicates a continuing slowdown in the economy with export orders pretty depressed while at the same time inflationary pressure is still rising, so policy makers have no room to loosen policy.”

In the latest sign of tightening by the central bank, lenders will have to include margin deposits in calculations of their reserve requirements starting Sept. 5, according to a People’s Bank of China document obtained by Bloomberg News on Aug. 30. The move is intended to deal with the rapid growth in banks’ off-balance sheet lending that’s complicating the central bank’s attempts to control liquidity, according to UBS’ Hong Kong-based economist Wang Tao.

Banks will have to set aside a total of almost 900 billion yuan over the next six months to comply with the central bank’s order, equivalent to 2.5 times the amount that would be required by a 50 basis-point increase in the overall reserve requirement, Wang said. The ratio now stands at 21.5 percent for the biggest banks.

--Li Yanping, Zheng Lifei. With assistance from Ailing Tan in Singapore, Sophie Leung in Hong Kong, Huang Zhe in Beijing. Editors: Nerys Avery, Ken McCallum

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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

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