China-to-Japan Slowdown Signs Support Case for Stimulus

Bloomberg's Margaret Conley breaks down PMI numbers and Rishaad Salamat gets analysis from Donna Kwok, a greater China economist for HSBC.

A Chinese manufacturing survey pointed to an 11th month of contraction and Japan’s exports fell in August, supporting the case for increased stimulus as Asia’s growth slows.

The preliminary reading was 47.8 for a China purchasing managers’ index today by HSBC Holdings Plc and Markit Economics, compared with a final level of 47.6 last month; a reading above 50 indicates expansion. Japan’s overseas shipments slid 5.8 percent on weakness in demand from Europe and China. A separate report showed euro-area manufacturing shrank for a 14th month.

Chinese Premier Wen Jiabao may need to roll out more stimulus to support growth that’s poised to slow for a seventh quarter after the Bank of Japan’s surprise decision yesterday to expand monetary easing. A dispute between China and Japan over islands claimed by both threatens to interfere with trade between the nations, adding to challenges for Asia as Europe’s debt crisis weighs on export demand.

“The two data sets are first and foremost a reflection of weak external demand,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. Japan needs further easing, while China “should have easier interest rates to support slowing domestic activity but will need to be targeted to avoid another housing boom,” Bennett said.

Banny Lam, Hong Kong-based chief economist at CCB International Securities Ltd., a unit of China’s second-largest bank by market value, said Chinese authorities are “likely to favor mild fiscal stimulus measures like tax cuts, consumption and investment- related subsidies as well as the acceleration of large-scale infrastructure project approvals.”

Stocks Fall

The MSCI Asia Pacific Index of stocks fell 1.3 percent. European stocks fell for the third time in four days, with the benchmark Stoxx Europe 600 Index (SXXP) slipping 0.2 percent.

The yuan strengthened, breaching the 6.3 per dollar level on speculation capital flows into emerging markets will quicken as policy makers in the world’s largest economies act to spur growth.

The U.S. Federal Reserve last week said it will begin open- ended buying of mortgage debt in a third round of so-called quantitative easing. Japan’s central bank yesterday expanded its asset-purchase fund by 10 trillion yen.

The preliminary China 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 final number will be released Sept. 29. A figure below 50 would extend the longest run of contraction readings in the survey’s eight-year history.

Job Cuts

“With the sharp deceleration in exports growth over the past a few months and external headwinds still strong, manufacturers, especially those more exports-oriented, will be increasingly forced to cut more jobs in the months ahead,” Sun Junwei and Qu Hongbin, China economists at HSBC, said in a report today.

Further monetary easing and fiscal spending will be required to help secure funding for new construction projects after the government said this month it approved more roads and subways, the HSBC researchers said.

A separate, government-backed index of purchasing managers’ views at manufacturers, which fell to a nine-month low of 49.2 for August, is due to be released Oct. 1.

China’s gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the smallest gain in three years and the sixth quarterly deceleration. Growth may cool to 7.4 percent this quarter, based on the median estimate of 23 economists surveyed by Bloomberg News from Sept. 11 to Sept. 18.

External Demand

Shen Danyang, a Ministry of Commerce spokesman, said yesterday that external demand may be weaker in the coming months than in the January-August period. Exports increased 7.1 percent in the first eight months from a year earlier, while imports rose 5.1 percent, putting the nation at risk of missing a goal for 10 percent expansion of trade this year.

Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, said Aug. 29 that the current quarter is the “most difficult” period this year. The Shanghai-based company cut the annual production target for crude steel by 5 percent and iron by 2 percent because of weakening demand and a sale of unprofitable units, Chairman He Wenbo said.

Japan’s exports declined for a third month while imports slid 5.4 percent, leaving a trade deficit of 754.1 billion yen ($9.6 billion), the Finance Ministry said in Tokyo today. Median forecasts in Bloomberg News surveys of analysts were for a 7.5 percent export decline and an 829.3 billion yen trade gap.

China Shipments

The report showed shipments to China decreased 9.9 percent, the third monthly decline, after Bank of Japan (8301) Governor Masaaki Shirakawa said yesterday that China’s slowdown was a major topic at the central bank’s latest policy meeting.

Elsewhere in the Asia Pacific region, New Zealand’s economic growth slowed less than economists forecast, bolstering the local currency. Taiwan’s central bank left its benchmark interest rate unchanged at 1.875 percent for a fifth straight meeting to damp inflation even as the economy struggles.

In the euro area, an indicator of services output dropped to 46 in September, a 38-month low, from 47.2 in August, Markit said. A composite index of services and manufacturing declined to 45.9 from 46.3. Economists had forecast a reading of 46.6 for the composite gauge, according to a Bloomberg survey.

Euro-Area Slump

The region’s economy is heading for a second straight quarterly contraction after a 0.2 percent slump in the three months through June as fallout from the fiscal crisis damps consumer spending and corporate investment. European Central Bank President Mario Draghi this month unveiled details of an unlimited bond-purchase program to regain control of interest rates and fight speculation of a currency breakup.

“In the following months, we cannot rule out some temporary increase in the PMIs as positive sentiment” from the ECB announcement “may take time to pass through to the real economy,” Nomura International Plc economists including Stella Wang in London said in an e-mailed note. “However, we remain pessimistic on the growth outlook.”

A U.K. manufacturing index rose more than economists forecast in September, suggesting the economy is showing signs of recovering from recession. A gauge of factory orders rose to minus 8 from minus 21, the Confederation of British Industry said. The median of 12 forecasts in a Bloomberg survey was for a reading of minus 15. An export orders index also increased.

U.S. Manufacturing

In the U.S., manufacturing output growth probably slowed in September, the median of 13 economists’ estimates in a Bloomberg survey showed. Other U.S. reports include initial jobless claims and the Bloomberg Consumer Comfort Index.

China’s central bank has held off from easing after cutting interest rates in June and July and lowering lenders’ reserve requirement ratio three times from November to May.

At the same time, the government has sped up project approvals to boost investment and help reverse the slowdown. The National Development and Reform Commission, the top economic planning agency, this month published approvals for roads and subways projects that Nomura Holdings Inc. estimated are valued at about 1 trillion yuan ($158 billion).

China may enact more stimulus measures after a Communist Party congress this year, Lam said. The central bank will use reverse-repurchase agreements as its “tool of choice for injecting liquidity when required,” he said.

Through the end of the year, “we expect the PBOC to engage in limited and highly targeted stimulus measures designed to prop up specific sectors,” Lam said.

--Zheng Lifei. With assistance from Zhou Xin in Beijing, Sunil Jagtiani in New Delhi, Patrick Henry in Brussels and Fergal O’Brien in London. Editors: Scott Lanman, Shamim Adam

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

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

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