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China Manufacturing Gauge Shows Slowdown May Be Ebbing

China’s manufacturing may contract at a slower pace in July after two interest-rate cuts and a rebound in lending spurred demand in the world’s second-largest economy, a private survey indicated.

The preliminary reading was 49.5 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics. If confirmed, that would be the highest since February. In June, the final number was 48.2.

A slowdown triggered by weakness in exports, a crackdown on housing speculation and past monetary tightening has sent Chinese stocks to their lowest level since 2009. Standard Chartered Plc estimates expansion will rebound to above 8 percent this quarter after sliding to 7.6 percent in the April- June period.

“Earlier easing measures are starting to work,” Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a statement. “That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure. This calls for more easing efforts to support growth and jobs.”

A final reading below 50 would cap a nine-month run, the longest in the index’s eight-year history and surpassing the stretch from August 2008 to March 2009.

The preliminary reading, called the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of more than 420 companies, according to HSBC. The government’s own monthly index, due to be released on Aug. 1, had a June reading that was the lowest since November.

Yuan, Stocks

The Shanghai Composite Index rose 0.1 percent as of 2:38 p.m. local time, while the yuan was little changed at 6.3857 per dollar. The MSCI Asia Pacific Index of stocks was little changed.

Separately today, the Conference Board said its leading index for China’s economy rose 0.1 percent in June from May, citing a preliminary reading. That compares with a 1.1 percent gain in May, the New York-based research group said.

The HSBC/Markit survey showed production, new orders and new export orders may improve while employment may worsen. The production gauge’s preliminary reading for July was 51.2, a nine-month high and the first time above 50 in five months, compared with a final reading of 49.3 in June, HSBC said.

The employment gauge may decline in July to the lowest level since March 2009, HSBC said.

ZTE Profit

ZTE Corp. (763), China’s second-biggest maker of telecommunications equipment, said this month that first-half profit may have declined as much as 80 percent. At the same time, Volkswagen AG (VOW), Europe’s largest carmaker, reported accelerating first-half sales growth as Chinese and U.S. demand helped its premium Audi division and namesake VW brand.

“Conditions are deteriorating in the global economy with the European fiscal crisis resurfacing,” South Korea’s Finance Ministry said today in a report to parliament.

A preliminary manufacturing index is due in the U.S. today, with analysts predicting a reading of 52 for July down from a final 52.5 in June, according to the median estimate in a Bloomberg News survey. Also in the U.S., the Federal Housing Finance Agency releases a home-price index and the Richmond Federal Reserve gives manufacturing survey results.

Manufacturing and services data is due today in France, Germany and the euro region.

Yen Concern

In Asia, Japanese Finance Minister Jun Azumi indicated increased concern about the yen’s advance, a signal that the government could intervene in foreign-exchange markets.

“It’s obvious that recent one-sided moves in the yen fail to reflect the real state of the Japanese economy,” Azumi said at a press conference in Tokyo today. “We won’t rule out any possible options to counter excessive moves” he said, adding that he is “ready to act decisively if needed.”

The People’s Bank of China has cut interest rates twice in the past two months and widened the discount on benchmark lending rates that banks can offer to clients.

Chinese banks may issue 1 trillion yuan ($157 billion) of new local-currency loans in July as “the government’s stimulus policies are transmitted to the real economy,” Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc., said in a July 19 note to clients. China’s gross domestic product growth bottomed in the second quarter and will rebound in the second half, he said. Loans totaled 919.8 billion yuan in June.

Investment Pickup

Fixed-asset investment excluding rural households accelerated in June, with the government reporting 20.4 percent growth in the first half from a year earlier, up from 20.1 percent in the first five months of 2012. The government has boosted its planned railway investment this year by 9 percent, based on a statement dated July 6 on the website of the National Development and Reform Commission’s Anhui branch.

China’s property market may be starting to rebound after government restrictions pushed down prices. New home prices in June rose in the most number of cities tracked by the government in 11 months as buyer sentiment improved with lower interest rates.

Not all signs are pointing to an immediate acceleration in the nation’s economy.

More than 2,000 Hong Kong-owned factories in the Pearl River Delta may close this year as export orders fall and wages rise, Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, said last week. The organization’s members have garment, watch, toy and footwear factories in the export hub of Guangdong.

Labor Situation

Wen said last week that he sees a more “severe” Chinese employment situation ahead and that the world economy faces “more factors of instability and uncertainty” as well as “downward pressure.”

Sany Heavy Industry Co., China’s biggest maker of excavators, lowered its annual unit-sales forecast, Vice Chairman Xiang Wenbo said in a July 11 interview. A “meaningful recovery” in demand for earth-moving equipment may not be visible until the first quarter of next year, Xiang said.

Song Guoqing, an academic member of the People’s Bank of China monetary policy committee, on July 21 predicted economic growth may cool to 7.4 percent this quarter. He said a drop in producer prices, combined with rising consumer prices, may hurt investment returns of industrial companies, damping their desire to expand.

China’s export growth in the first half cooled to 9.2 percent, down from 24 percent in the first six months of 2011, as Europe’s austerity measures and government debt burdens capped shipments. The nation is targeting 10 percent gains in exports and imports combined for the year.

--Zhou Xin. With assistance from Zheng Lifei and Nerys Avery in Beijing. Editors: Scott Lanman, Paul Panckhurst

To contact the reporter on this story: Zhou Xin in Beijing at xzhou68@bloomberg.net

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

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