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China Manufacturing Faces ‘Slowdown, Not a Meltdown’

China’s Manufacturing Growth Is Weakest in 17 Months
A textile industry worker sews clothing at a wholesale market in Dongguan. Photographer: Nelson Ching/Bloomberg

China’s July manufacturing data were the weakest in more than a year as the government clamped down on property speculation and investment in polluting and energy- intensive factories.

A purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics slid to 49.4 from 50.4 in June. A separate, government-backed PMI fell to 51.2 from 52.1, the Federation of Logistics and Purchasing reported yesterday. Fifty is the dividing line between expansion and contraction.

Officials may delay raising interest rates from crisis levels as austerity measures and unemployment in advanced economies dim the outlook for exports. China’s stocks rose after today’s data, as analysts including those at Morgan Stanley said the government may do more to aid growth by year-end.

“Government measures are taking overheating risks out of the economy, but any further weakening would be worrisome as China’s export outlook may also deteriorate,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. “The scope for yuan appreciation is declining further and there will be no interest rate hikes in the second half.”

The HSBC PMI’s reading was the first below 50 in 16 months. Measures of output, orders and export orders all showed contractions. The government PMI, released by the statistics bureau and the logistics federation, showed the weakest expansion in 17 months.

‘No Need to Panic’

The Shanghai Composite Index closed 1.3 percent higher today after climbing 10 percent in July for the biggest monthly increase in a year. Twelve-month yuan forwards also gained today.

“We’re in a moderate slowdown, not a double-dip,” said Ken Peng, a Beijing-based economist for Citigroup Inc. Similarly, HSBC economist Qu Hongbin said China is having a “slowdown not a meltdown” and “there is no need to panic.”

Passenger-car sales grew at a faster pace in July, the China Automotive Technology & Research Center reported today. The annual 15.4 percent gain compared with 10.9 percent in June.

Across Asia, manufacturing PMIs released by HSBC and Markit today showed a slowdown in Taiwan and a dip to 53.2 from 53.3 for South Korea. In India, growth accelerated.

China’s economy is still helping to power growth in Europe, reports published today showed. Euro region manufacturing expanded faster than initially estimated in July, with a gauge compiled by Markit Economics rising to 56.7 from 55.6 in the previous month. Swiss manufacturing grew the most on record and U.K. activity slowed less than economists had forecast.

U.S. Slows

In the U.S., manufacturing expanded in July at the slowest pace this year. The Institute for Supply Management’s factory index fell to 55.5 last month from 56.2 in June. A reading greater than 50 points to expansion, and the median forecast of economists surveyed by Bloomberg was 54.5.

Elevated unemployment in the U.S. and austerity measures by indebted European governments put an extra focus on China’s role as a driver of world growth.

Yi Gang, a vice governor of the central bank, said last week that China already had the world’s second-biggest economy. In contrast, the government’s Xinhua News Agency reported July 23 that Japan could retain the No. 2 slot this year because of gains by the yen and China’s moderating growth.

Societe Generale SA cautioned last week that seasonal distortions raised the risk that July PMI readings could fall below 50. Goldman Sachs Group Inc. said yesterday that, adjusted for seasonality, the official PMI rose rather than declined.

HSBC’s PMI is weighted more toward smaller, private businesses, including exporters, than the government’s survey.

Government Goals

The economy is cooling as the government trims credit growth from last year’s record $1.4 trillion, presses for gains in energy efficiency as a five-year plan comes to an end, and discourages multiple-home purchases. Signs of a slowdown include China Petroleum & Chemical Corp., or Sinopec, reporting July 20 that its crude-oil processing increased at a weaker pace in the second quarter.

The government is part-way through exiting crisis policies after raising banks’ reserve requirements three times this year and scrapping the yuan’s peg to the dollar. The benchmark one-year lending rate is 5.31 percent, compared with 7.47 percent before cuts in 2008 to combat the effects of the global financial crisis.

While the nation’s expansion may continue to moderate from a peak in the first quarter, the full-year growth rate may be as high as 9.5 percent, up from 9.1 percent in 2009, State Council researcher Zhang Liqun said yesterday.

Hit to Growth

Morgan Stanley economist Wang Qing said yesterday that a government campaign to close energy-inefficient businesses likely contributed to a slowdown in heavy industry. UBS AG economist Wang Tao estimates economic growth could be cut by 2 percentage points in the second half of the year if officials don’t waiver from energy-efficiency goals.

China’s economic growth dipped to a 10.3 percent annual pace in the second quarter from 11.9 percent in the first three months of the year.

“The Chinese economy is slowing down mainly due to the ongoing property-tightening measures,” Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch, said yesterday. “Beijing will surely ramp up spending on public housing and other public works to stabilize growth.”

The government may keep policies largely unchanged for the rest of the year, making adjustments for “selected” industries as needed to sustain growth, the logistics federation said in a statement on its website today analyzing the official PMI numbers. China’s export rebound is not yet solid, natural disasters could cut agricultural output and inflation risks remain, the organization said.

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