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China Case for Stimulus Builds as Manufacturing Weakens: Economy

China’s manufacturing may be contracting at a faster pace this month, signaling more monetary and fiscal stimulus is needed to secure a second-half rebound in economic growth.

A preliminary reading of 47.8 for a purchasing managers’ index released today by HSBC Holdings Plc (HSBA) and Markit Economics compares with July’s final 49.3 figure. If confirmed, it would be the lowest level since November and the 10th month that the reading has been below 50, the longest run in the index’s eight- year history.

The world’s second-biggest economy may slow for a seventh straight quarter even after interest-rate cuts in June and July and accelerated investment approvals to counter an export slowdown. People’s Bank of China Governor Zhou Xiaochuan said yesterday that adjustments to rates and bank reserve requirements can’t be ruled out, as minutes of a Federal Reserve meeting fueled speculation that U.S. officials will ease.

“Weak PMIs will likely put more pressure on the PBOC to loosen monetary policy by cutting the reserve requirement ratio,” said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc. who formerly worked for the International Monetary Fund. “Export weakness in July may have continued into August.”

The benchmark Shanghai Composite Index (SHCOMP) of stocks fell as much as 0.5 percent after the release before rising 0.2 percent at 2:42 p.m. on speculation the U.S. and China will increase economic stimulus. The yuan weakened and the Australian dollar pared gains.

Additional Stimulus

The report adds to evidence of a global slowdown that’s boosting pressure on governments and central banks to step up efforts to support growth. Many U.S. Federal Reserve policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, minutes of the Fed’s July 31-Aug. 1 meeting released yesterday showed.

Chicago Fed President Charles Evans told reporters in Beijing today that “I certainly would applaud anybody who takes action in order to strengthen their economies,” including China.

China has this week injected a net 278 billion yuan ($44 billion) into the financial system through reverse repurchase agreements, the largest amount since January. The reserve ratio for lenders was last lowered in May and now stands at 20 percent for the largest banks.

Bank of America Corp. forecasts the central bank will reduce the ratio three times more times, with the first cut “imminent,” according to Lu Ting, the investment bank’s head of Greater China economics in Hong Kong. He also expects two more interest-rate cuts.

Europe Contraction

Other reports today may add to evidence of slowing growth. Taiwan’s industrial production probably fell for a fifth month in July from a year earlier, economists surveyed by Bloomberg predict. Singapore consumer prices slowed more than economists estimated in July, Department of Statistics data showed.

PMI reports in Germany and France for August are forecast to show manufacturing is still contracting in Europe’s largest economies. German economic growth slowed to 0.3 percent from 0.5 percent in the first three months of the year, the government said, confirming an initial estimate published Aug. 14.

In the U.S., the Labor Department may say initial jobless claims were little changed last week, while a Markit Economics preliminary index of manufacturing is forecast to show an expansion this month. Buoyed by cheaper properties and record- low mortgage costs, sales of new homes probably rebounded in July from the prior month, economists forecast ahead of a Commerce Department report.

Export Slump

China’s export growth collapsed to 1 percent in July from a year earlier after an 11.3 percent gain in June and industrial production and lending missed economists’ forecasts, data released earlier this month showed. Today’s HSBC PMI report indicates the weakness may persist.

An index of new export orders was the lowest since March 2009 and an output gauge was the weakest in five months, while measures of input and output prices dropped.

China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the country’s largest shipbuilder outside state control, this week reported an 82 percent drop in first-half profit and said it received orders for two vessels in the first half compared with 24 a year earlier.

Cotton consumption in China may shrink 11 percent this year as demand falters, Zhang Hongxia, chairman of Hong Kong-listed Weiqiao Textile Co. (2698), China’s largest cotton-textile maker, said in an interview this week. “The Chinese economy is only at the beginning of a harsh winter,” Zhang said.

Center Stage

The ruling Communist Party is preparing to hand over power later this year to a new generation of leaders in a once-a- decade transition. Bank of America’s Lu said in a note today that “politics will gradually take a back seat and economic policymaking will take the center stage again” after a seaside meeting of top politicians to decide on senior leaders and the murder trial and conviction of the wife of ousted official Bo Xilai.

The manufacturing gauge’s preliminary reading, called the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of more than 420 companies. The data for this month’s reading was collected from Aug. 13-21. The final figure will be released Sept. 3.

The government’s own index, due Sept. 1, had a July reading of 50.1, the weakest in eight months, and down from 50.2 in June.

Slower Growth

The official gauge will probably be below 50 for August and third-quarter economic growth is “highly likely” to be lower than in the second quarter, said Yao Wei, China economist at Societe Generale SA in Hong Kong. The chance of an interest-rate cut is rising “regardless of inflation,” she said.

A separate report today showed that a leading index for China’s economy rose in July after a little-changed June reading, according to the Conference Board, a New York-based research group.

Foreign direct investment in China declined 8.7 percent in July from a year earlier to $7.58 billion, the eighth drop in nine months and the smallest inflow since July 2010, a report last week showed. Chinese financial institutions sold a net 3.8 billion yuan of foreign currency in July, indicating capital outflows as property curbs and export weakness slow growth and the yuan weakens.

Rising property prices are complicating the government’s efforts to add stimulus. China’s new-home prices advanced in the largest number of cities in 14 months in July after interest- rate cuts and incentives for first-time buyers.

--Zhou Xin. With assistance from Zheng Lifei in Beijing and Shamim Adam in Singapore. Editors: Scott Lanman, Nerys Avery

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

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

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