China Manufacturing Weakest Since ‘09 Augurs Easing: Economy

China’s Manufacturing Contracts for First Time Since 2009
A gauge of new orders contracted for the first time since January 2009 and the output index expanded at the slowest pace since the same month, today’s survey showed. Photographer: Doug Kanter/Bloomberg

China’s manufacturing recorded the weakest performance since the global recession eased in 2009, underscoring the case for monetary stimulus as Europe’s crisis weighs on the world’s second-largest economy.

A purchasing managers’ index compiled by the China Federation of Logistics and Purchasing slid to 49 in November, lower than all but two of 18 forecasts in a Bloomberg News survey. Readings below 50 signal a contraction. Separate reports showed slowing retail sales and an industrial slump in Australia, which relies on China as its biggest export customer.

Premier Wen Jiabao is shifting policy gears as Europe’s woes combine with a domestic real-estate slowdown to impair the outlook for growth, with China’s central bank yesterday lowering lenders’ reserve ratios. Asian nations from China to India to South Korea will cut key interest rates next year as the global economy deteriorates, Goldman Sachs Group Inc. predicted today.

“China’s economy will slow sharply in coming months,’ said Zhang Zhiwei, chief China economist at Nomura International Hong Kong Ltd., who correctly predicted the PMI reading. Zhang said growth may slow to less than 8 percent and forecast another reserve-ratio cut in January, with stronger policy steps likely if Europe’s crisis worsens.

A separate PMI released by HSBC Holdings Plc and Markit Economics slid to 47.7, the lowest level since March 2009.

‘‘An across-the-board policy easing” may come as early as year-end as inflation cools, said Qu Hongbin, an economist at HSBC in Hong Kong. The economy can grow more than 8 percent next year after a 10.4 percent expansion last year, he said.

‘Grimmer’ Than 2008

Stocks in Asia climbed even with the weaker data after the U.S. Federal Reserve joined with Japanese, European and Canadian central banks overnight to boost dollar liquidity. The MSCI Asia Pacific Index rose 3.3 percent as of 12:45 p.m. in Tokyo.

The global economy faces a “grimmer and more challenging” situation than in 2008 because of constraints on fiscal stimulus and monetary policy, China’s Vice Finance Minister Zhu Guangyao said at a forum in Beijing today. Goldman Sachs cut its global growth forecast for 2012 to 3.2 percent from 3.4 percent in a report dated today.

Indian export and manufacturing data will be released today, while the Philippine central bank may announce at 4 p.m. local time that it is keeping interest rates on hold, according to the median estimate in a Bloomberg News survey of analysts.

Manufacturing reports today for the euro zone, Germany, France, Italy and the U.K. will show contractions, analysts’ median forecasts show.

U.S. Reports

Even as the European outlook sours, American data are signaling sustained expansion in the world’s largest economy. The Institute of Supply Management’s manufacturing PMI, due for release today, is forecast to reach a five-month high. Other data this week showed consumer confidence jumped the most since 2003 in November.

In Australia, manufacturing shrank for a fifth straight month, according to a survey released by the Australian Industry Group and PricewaterhouseCoopers today. Retail sales gained 0.2 percent in October, half the increase economists estimated, and home-building approvals fell. South Korea’s factory gauge slid to the lowest since October last year, a report from Markit and HSBC showed today.

Premier Wen aims to sustain the Chinese economy’s expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation limits asset-bubble risks and sends home sales sliding. Barclays Capital forecasts at least three more reserve-ratio cuts by mid-2012 and says two interest-rate reductions are likely next year. Benchmark one-year borrowing costs stand at 6.56 percent.

Easing Inflation

The economic slowdown may further ease inflation that has already moderated to 5.5 percent in China from a three-year high of 6.5 percent in July. That may give officials more room for resource price reforms, with the government yesterday increasing electricity prices for the first time in six months. The cost of power-station coal will also be capped in an attempt to reduce outages in coming months.

“The measures are aimed at easing cost pressure on utilities and making them generate more electricity,” said Dave Dai, regional head of clean energy and utilities research at Daiwa Capital Markets Hong Kong Ltd.

In the property market, officials aim to make housing more affordable without triggering a slump in construction. October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities, according to government data.

Domestic Demand

“China’s exports are expected not to grow next year as external demand weakens on a euro-zone recession, and property construction is also projected to slow markedly,” UBS AG economist Wang Tao said in a report today. “On the other hand, the government is expected to increase fiscal spending and ease credit policy to support domestic demand, with a boost to social and infrastructure investment.”

The government will be “cautious” about easing property curbs or allowing “another major credit expansion,” said Wang, who is based in Hong Kong.

Officials are still grappling with the aftermath of record lending in 2009 and 2010 which fueled price gains and led to credit risks for banks.

— With assistance by Paul Panckhurst

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