China Manufacturing Shrinks Faster in Threat to Europe

China’s manufacturing is shrinking at a faster pace this month, a trend that threatens to stem an economic recovery in the euro area from the currency bloc’s longest-ever recession.

A preliminary reading of 48.3 for the Chinese Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists. In Europe, a composite index based on a survey of purchasing managers in the services and manufacturing industries rose to 48.9 from 47.7 in May, Markit Economics said. While that’s the highest in 15 months, a measure below 50 still indicates contraction.

China’s manufacturing weakness, along with a cash crunch in the nation’s money market, will test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first four months of the year failed to stoke growth, China’s State Council, led by Li, said yesterday that the financial system needs to do a better job of supporting the economy.

The China PMI Index “is a reminder that a strong euro-zone export recovery is unlikely” to materialize soon, said Martin Van Vliet, senior euro-area economist at ING Bank NV in Amsterdam. “Any further recovery later in the year is likely to be very slow and bumpy.”

Euro Stagnation

The 17-nation economy will stagnate in the three months from April to June after six quarters of shrinking gross domestic product, according to a Bloomberg News survey of economists. It will grow 0.1 percent in the third quarter, the same survey shows.

The European Central Bank expects the euro-area economy to shrink 0.6 percent this year before expanding 1.1 percent in 2014. Recent economic survey data are showing “some improvement, but from low levels,” ECB President Mario Draghi said on June 18.

While the Frankfurt based ECB left its benchmark rate unchanged at a record low of 0.5 percent in June, policy makers stand ready to act further if economic conditions worsen, he said.

Cash Crunch

China’s seven-day repurchase rate, which measures interbank funding availability, rose 270 basis points, or 2.7 percentage points, to 10.77 percent in Shanghai, according to a daily fixing announced by the National Interbank Funding Center. That was the highest in data going back to March 2003. The one-day rate rose by an unprecedented 527 basis points to an all-time high of 12.85 percent, a separate fixing showed. An intra-day gauge of the one-day rate touched a record 30 percent.

“If market rates remain at such high levels, the only scenario for the Chinese economy is a hard landing,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing. “That possibility is growing now. It seems the leadership is deliberately taking a wait-and-see stance to see how low China growth can be.”

Authorities will boost credit support for industries the government has defined as strategic and those that are labor-intensive, the State Council said yesterday after a meeting led by Li, without identifying specific sectors. The nation must also more firmly guard against financial risks, and bank lending for projects in industries with overcapacity must be banned, the State Council said.

Home Prices

The benchmark Shanghai Composite Index fell 2.8 percent today to its lowest level since Dec. 13.

If confirmed on July 1 in the final PMI reading, today’s level would be the lowest since September. The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own PMI survey, with a bigger sample size, the same day. The official PMI in May was 50.8, up from 50.6 in April.

The preliminary, or flash PMI, from HSBC is based on about 85 percent to 90 percent of responses from more than 420 manufacturers.

Industrial production rose a less-than-forecast 9.2 percent last month from a year earlier and factory-gate prices fell for a 15th month, while export gains were at a 10-month low and imports dropped.

At the same time, new-home prices rose at the fastest pace in more than two years in major cities in May, constraining the ability of policy makers to ease credit in response to weakening economic growth.

Growth Downgrades

“Beijing prefers to use reforms rather than stimulus to sustain growth,” Qu Hongbin, HSBC’s Hong Kong-based chief China economist, said in a statement. “While reforms can boost long-term growth prospects, they will have a limited impact in the short term. As such we expect slightly weaker growth” this quarter, he said.

Yingli Energy (China) Co., a unit of the world’s largest solar-panel maker, said June 13 that it will slow investments to clear debt after facing anti-dumping duties in Europe.

Investment banks from Morgan Stanley to UBS AG this month cut their estimates for China’s growth in 2013, and Barclays Plc is estimating that expansion will slow to 7.4 percent, below the government’s full-year target of 7.5 percent.

Economists forecast China’s gross domestic product will expand 7.6 percent in the April-June period from a year earlier, the median estimate of 35 respondents to a Bloomberg News survey conducted from June 14 to 19. That compares with a 7.8 percent median projection in last month’s survey and first-quarter growth of 7.7 percent.

China Rates

Analysts also trimmed growth forecasts to a median estimate of 7.7 percent this year, down from 7.8 percent projected in May, and 7.6 percent in 2014, also down from last month’s 7.8 percent. The economy expanded 7.8 percent in 2012, a 13-year low, and the government set a target for 7.5 percent growth in 2013.

Three out of 31 analysts expect a cut in the benchmark lending rate this year, compared with two out of 27 in May’s survey. Four out of 20 foresee a reduction in banks’ reserve requirements in 2013, up from two out of 17 last month.