China Manufacturing Teeters Close to Contraction

China Manufacturing Expands at Slowest Pace in Eight Months
Today’s data increase odds China will introduce more measures to stem a deceleration in the world’s second-biggest economy that may extend into a seventh quarter. Photographer: Nelson Ching/Bloomberg

China’s manufacturing teetered on the edge of contraction in July and South Korea’s exports and inflation declined, indicating that stimulus efforts have yet to bear fruit.

The Purchasing Managers’ Index in China unexpectedly fell to 50.1 in July, the weakest in eight months, from 50.2 in June, a government report showed today. Fifty marks the dividing line between expansion and contraction. South Korea’s exports slid by more than double the amount forecast by analysts and inflation moderated to a 12-year low.

The data increase odds China and South Korea will add to interest-rate cuts in the coming months as a record-high jobless rate in the euro area drags on global growth. Leaders of China’s ruling Communist Party pledged yesterday to keep adjusting policies to ensure stable growth while signs of a revival in the housing market may improve chances of reversing the nation’s slowdown.

“It’s almost certain that there will be more loosening,” said Daniel Martin, Singapore-based Asia economist at Capital Economics Ltd. “The whole region is going to see fairly disappointing growth this year.” He sees at one more interest-rate cut in China and at least one more this year by South Korea.

The reading today from the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing and compares with the 50.5 median estimate in a Bloomberg News survey.

Three of 24 economists surveyed had forecast a decline in the gauge from June. The report showed indexes of output and new export orders were at the lowest levels since November, while a new orders gauge showed a contraction for a third month and employment declined. A reading on imports was the weakest since February 2009.

Policy Support

“It is clear that the manufacturing sector is doing very poorly and requires policy support,” Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB, said in a research note today. The chance of an interest-rate cut is “up to about a third now from a quarter yesterday,” and a reduction in banks’ reserve requirements is “fairly imminent,” he said.

A separate purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics indicated that manufacturing contracted at a slower pace in July. The gauge, which covers more than 420 companies and is weighted more toward smaller businesses, rose to 49.3 from 48.2 in June, after a preliminary reading of 49.5 released last week.

Index Decline

The MSCI Asia Pacific Index of stocks, a regional benchmark, fell 0.4 percent at 3:24 p.m. in Tokyo, set for the first drop in five days.

In South Korea, exports slid 8.8 percent in July from a year earlier, the steepest decline since September 2009, Ministry of Knowledge Economy data showed today. The median estimate in a Bloomberg News survey of 15 economists was for a 3.7 percent drop. Consumer prices increased 1.5 percent, Statistics Korea said.

Wang Tao, China economist at UBS AG in Hong Kong, said the official PMI data are “not well seasonally adjusted” and that accounting for those effects shows an increase in the gauge last month, “suggesting that manufacturing activity is indeed bottoming out.”

Gains in China’s currency against the U.S. dollar have stalled as export growth slowed. The yuan has weakened about 1 percent this year.

The People’s Bank of China has lowered interest rates twice starting June 8 and reduced the amount of cash banks must set aside as reserves three times since cuts began in November.


Premier Wen Jiabao reiterated China will put more emphasis on stabilizing growth and intensify “fine-tuning” while “unswervingly” implementing property controls and prevent home prices from rebounding, the official Xinhua News Agency said in a report yesterday. Downward pressure on the domestic economy is relatively large and low global growth will persist for a “fairly long period,” the report said, citing Wen.

China’s economy grew 7.6 percent in the second quarter from a year earlier, the least in three years. While Nomura Holdings Inc. forecasts a recovery to 8.1 percent in the current quarter, Song Guoqing, an academic adviser to the central bank, projects a further decline to 7.4 percent.

Purchasing managers’ index readings for July were released across Asia today, with manufacturing contractions in South Korea and Taiwan deepening, according to HSBC gauges compiled by Markit Economics. A similar measure for Indonesia rose, while the country’s June exports fell 16.4 percent from a year earlier, compared with the median estimate for a decline of 7.9 percent.

Philippines Policy

The Philippines has fiscal and monetary space to support the economy, officials said in Manila today. A favorable inflation outlook gives the central bank more room for policy action, if needed, as a protracted global slowdown and capital flows pose risks, Governor Amando Tetangco said. Bangko Sentral ng Pilipinas last week cut its benchmark interest rate to a record low of 3.75 percent.

In Europe, PMI manufacturing readings are due for the U.K., Italy, France, Germany and the euro area while a report today showed U.K. home prices had their biggest annual drop in three years in July.

U.S. Federal Reserve policy makers conclude their two-day meeting today. While they refrained from introducing a third round of asset purchases at their June session, Chairman Ben S. Bernanke indicated last month that it’s an option. The Institute for Supply Management’s U.S. factory index probably rose to 50.2 in July, according to the median prediction in a Bloomberg survey.

Signs of a pickup in China’s economy are mixed. While June’s new local-currency loans were the highest since March, industrial companies’ profits fell for a third month.

Turning Point

China’s new home prices posted the biggest gain in more than a year, signaling a turning point for the nation’s property market, according to a statement today from SouFun Holdings Ltd., the country’s biggest real estate website owner.

China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s largest private shipbuilder, said this week its first-half profit probably fell “significantly” on a drop in prices and orders. Japan’s Komatsu Ltd., the world’s second-biggest maker of construction equipment, yesterday warned of slower Chinese demand. The company estimated industrywide sales in China may fall as much as 30 percent this year after earlier estimating growth of as much as 5 percent.

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