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China Manufacturing Growth Moderates on Tightening, Exports

China July Manufacturing Expansion Slowed to 50.7 in July
A factory worker produces tires at the Pirelli & C SpA tire factory in Jining, Shandong Province, China. Photographer: Keith Bedford/Bloomberg

China’s manufacturing slowed less than economists estimated in July even as smaller businesses were hurt by tighter credit and weakness in export demand.

The Purchasing Managers’ Index was at 50.7 compared with 50.9 in June, the China Federation of Logistics and Purchasing said in a statement in its website today. That exceeded each forecast in a Bloomberg News survey of 13 economists. A separate measure released by HSBC Holdings Plc contracted for the first time in a year.

Premier Wen Jiabao’s campaign to boost investment in social housing and raise wages may help sustain growth in the world’s second-largest economy as a faltering U.S. recovery and Europe’s debt woes cap demand for Chinese-made goods. Export orders fell to their lowest level in 17 months, federation data show.

“Growth has decelerated in the face of the global soft patch in export demand and the weight of tightening,” said David Cohen, an economist at Action Economics Ltd. in Singapore. He added that the government “will be able to achieve a soft landing, tightening enough to prevent inflation from getting out of hand but at the same time allowing continued growth.”

China’s central bank said today that the fundamentals of economic growth are “still good” and reining in prices will remain its “top priority.”

Inflation expectations “remain strong and the foundation for stabilizing prices is not solid,” the People’s Bank of China said in a statement on its website after an internal meeting to discuss its tasks for the rest of the year.

Slower Export Orders

The benchmark Shanghai Composite Index rose 0.1 percent to 2,703.78 at the 3 p.m. close. The central bank set the yuan’s reference rate against the U.S. dollar at a record high of 6.4399. The Chinese currency was little changed at 6.4354 at 4:03pm in Shanghai, according to the China Foreign Exchange Trade System.

Today’s statement from the logistics federation showed production and new export orders grew at a slower pace for the fourth month.

Still, the new orders index increased in July for the first time in four months while input prices grew at a slower pace for the fifth straight month, rising the least since July 2010.

“Further tightening is not needed given that the input price index fell further, indicating subsiding price pressures at the factory gate,” said Dariusz Kowalczyk, a Hong Kong-based strategist with Credit Agricole CIB.

A reading above 50 indicates an expansion. Apart from 2009, the index has declined each July since the series was first published in January 2005, previously released data show. The gauge is based on a survey of purchasing managers in more than 820 companies in 20 industries. It last dropped below 50 in February 2009.

‘Lackluster’ Demand

The purchasing managers’ index released by HSBC and Markit Economics fell to its lowest level since March 2009. The index’s final reading was revised upwards to 49.3 from the preliminary figure of 48.9 published on July 21. The gauge is based on a survey of more than 400 companies.

The data “confirmed the slowing growth momentum of the manufacturing sector against the backdrop of sustained tightening and lackluster external demand,” said Qu Hongbin, chief China economist at HSBC in Hong Kong. “The current level of the PMI is still consistent with a 12 percent to 13 percent growth rate of industrial production.”

Output growth of 13 to 15 percent is possible for the rest of the year even as companies face pressure from rising raw material, energy and labor costs, Zhu Hongren, spokesman for the Ministry of Industry and Information Technology said at a briefing on July 21.

Rising Incomes

Economic expansion is being supported by spending on low-cost housing and rising wages.

The government, which has pledged to build 36 million low-cost homes by 2015, will ensure that the construction of 10 million units begins by the end of November, the State Council said last month.

A total of 13 provinces raised minimum wages in the first quarter of the year by an average 21 percent, data from the Human Resources and Social Security Ministry show. Per capita urban disposable income rose 13.2 percent in the first half of the year and rural cash incomes climbed 20.4 percent, the statistics bureau said last month.

Nissan Motor Co. said last week its Chinese joint venture plans to invest 50 billion yuan ($7.8 billion) by 2015 to raise vehicle sales to more than 2.3 million units a year as growth boosts demand.

‘Financial Distress’

The HSBC PMI may show a lower reading than the official index because it focuses on small and medium-sized companies that have been affected more than state-owned enterprises in the government’s tightening campaign, Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. said today.

Many smaller manufacturers are facing “financial distress” after the central bank raised banks’ reserve requirements to a record over the past 18 months, draining an estimated 4.1 trillion yuan from the banking system, Tao Dong, chief China economist at Credit Suisse AG in Hong Kong said in a July 21 note.

The People’s Bank of China has paused for six weeks since last boosting the requirement, the longest gap since a series of increases began in November.

Economists at Daiwa Capital Markets Hong Kong Ltd. estimate the logistics federation’s index could drop below 50 over coming months based on a slowdown in trade and falling inventories of raw materials which suggest further destocking pressure on companies during the summer.

‘Robust’ Demand

In contrast, Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group in Hong Kong, said weak PMI readings in July are “usually followed by a strong rebound in August.” Domestic demand “will remain robust on the expected tax cut starting Sept. 1 and the ambitious public housing program,” he said in a note today.

China’s economy is slowing after the government raised interest rates, curbed lending, and limited home purchases and property development to rein in inflation that’s exceeded the government’s 4 percent ceiling every month this year.

Consumer prices climbed 6.4 percent in June driven by a 14 percent gain in food costs. Economic growth slowed to 9.5 percent in the second quarter from a year earlier from a 9.7 percent increase in the first three months.

For the full year, expansion will moderate to 9.6 percent from 10.3 percent in 2010, the International Monetary Fund forecast in a July 21 report.

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