China Contraction in Manufacturing Boosts Case for Easing Policy: Economy

China’s manufacturing (EC11CHPM) contracted for a second month in December as Europe’s debt crisis cut export demand, fueling speculation that the central bank may cut lenders’ reserve requirements within days.

A purchasing managers’ index was at 48.7 in December from 47.7 in November, HSBC Holdings Plc and Markit Economics said today. A reading below 50 indicates a contraction.

Export orders (CNFREXPY) fell in December for the first time in three months and domestic demand was “sluggish,” today’s report said. Demand for cash ahead of the week-long Chinese Lunar New Year holiday starting Jan. 23 may give officials an additional reason to cut banks’ reserve ratios after a reduction last month that was the first since 2008.

“A reserve ratio cut is likely to happen by Jan. 3, before markets resume trading,” said Li Wei, a Shanghai-based economist with Standard Chartered Bank. China’s exports are under threat because “the euro area is slipping into a recession and the U.S. is also expected to slow down in early 2012,” Li said.

A deeper slowdown in China, the world’s second-biggest economy, would impair a global expansion that is already faltering because of Europe’s austerity measures. Asian stocks rose today, paring the regional index’s first annual decline in three years, on signs of strength in the U.S. economy, where a report yesterday showed stronger-than-forecast home sales.

‘Starting to Bite’

The MSCI Asia Pacific Index added 0.2 percent at 12:42 p.m. in Tokyo, heading for an 18 percent drop this year.

In China, “weakening external demand is starting to bite,” said Qu Hongbin, a Hong Kong-based economist for HSBC. Policy easing may enable China’s economy to avoid a “hard landing,” he said.

Elsewhere in Asia, data from South Korea showed the government wrestling with elevated inflation even as threats to growth mount. The leadership handover in North Korea as Kim Jong Un takes control after the death of Kim Jong Il may undermine confidence in the South by adding to the risk of instability on the Korean peninsula.

South Korea’s inflation exceeded the central bank’s target and all forecasts in a Bloomberg News survey (KOCPIYOY), limiting the scope for an interest-rate cut in January to support growth. Consumer prices rose 4.2 percent from a year earlier, matching November’s gain, Statistics Korea said. The median estimate of 12 analysts was 4 percent, and the central bank targets inflation of 2 percent to 4 percent.

Australian Lending

In Australia earlier, a central bank report showed private lending by banks and other financial companies rose 0.3 percent in November from the prior month, matching the median of nine economists’ forecasts.

In Europe today, reports may show house prices in the U.K. were unchanged in December from a month ago and German retail sales rose 0.2 percent in November from the prior month, according to the median estimates of economists surveyed by Bloomberg.

In Spain, a report may show consumer prices advanced 2.5 percent in December from a year ago, while figures on Italian producer prices may show a 0.1 percent gain in November from the month before, surveys showed.

The Chinese manufacturing index released today is based on answers to questionnaires sent to purchasing executives at over 400 manufacturing companies. The statistics bureau and the China Federation of Logistics and Purchasing will release a separate manufacturing index (CPMINDX) on Jan. 1. Last month, that gauge showed the first contraction since February 2009.

Property Crackdown

In November, China’s export growth was the weakest since 2009, excluding seasonal distortions at the start of each year.

Hitachi Construction Machinery Co. (6305), Japan’s second-largest heavy-equipment maker, said this month that Chinese demand for excavators will decline in the first half of next year, as the government prolongs a crackdown on property speculation.

Developer China Vanke Co.’s contract sales dropped 36 percent last month from a year earlier, while new home prices in Shanghai, Beijing, Shenzhen and Guangzhou slid from the previous month.

China’s inflation slowed to 4.2 percent in November, the slowest pace in 14 months. Third-quarter economic growth of 9.1 percent was the least in two years.

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

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

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