China Manufacturing Weakens Further as Slowdown Deepens

China’s manufacturing weakened by more than estimated in July, according to a preliminary survey of purchasing managers that casts further doubt on the government’s ability to meet its annual economic growth target.

The reading of 47.7 for an index released today by HSBC Holdings Plc and Markit Economics, if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction. A separate euro-area gauge showed manufacturing unexpectedly expanded this month.

After facing down banks with a funding squeeze, China’s leaders yesterday pledged a five-year ban on construction of new office buildings for the government, the Communist Party and state enterprises. Premier Li Keqiang’s efforts to rein in credit, property prices, and officials’ extravagant spending risk worsening a slump even as state media say 7.5 percent growth is the lower limit for this year.

“The key thing now is confidence,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said on Bloomberg Television. “The confidence now is pretty weak both in the financial market and the corporate sector.”

Authorities signaled this week that they may protect growth of 7.5 percent this year and 7 percent in the future, stoking a China stock rally yesterday on speculation policy makers will boost spending on railroads and environmental gear to support the economy.

The government will probably plan additional spending that isn’t a “big stimulus” like 2008’s 4 trillion yuan ($586 billion at the time) plan and is instead meant to put a floor under the growth slowdown, Qu said.

Stocks Fall

The benchmark Shanghai Composite Index dropped 0.5 percent, the first decline in three days, while the MSCI Asia Pacific Index of stocks declined 0.2 percent.

The median estimate of 19 economists surveyed by Bloomberg News for the preliminary, or Flash Purchasing Managers’ Index, was for 48.2, the same level as in June. The Flash PMI from HSBC and Markit is based on about 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers.

Euro-area manufacturing unexpectedly expanded in July for the first time in two years, another report from Markit showed. A factory index rose to 50.1 from 48.8 in June, exceeding the median estimate of 49.1 in a Bloomberg survey of 39 economists.

Markit’s services gauge for the region rose to 49.6 from 48.3. A composite index of both sectors increased to 50.4, an 18-month high.

Response Needed

China’s economic slowdown has spurred forecasts for a government response. Bank of America Corp. sees a 150 billion yuan program of spending and tax incentives, Nomura Holdings Inc. is projecting cuts in lenders’ reserve requirements and Australia & New Zealand Banking Group Ltd. says authorities will reduce benchmark interest rates.

Most analysts expect no cuts this year in reserve requirements or interest rates, according to a Bloomberg News survey conducted from July 18 to July 23. At the same time, economists cut their gross domestic product forecasts, with the median estimate of 55 respondents now for 7.5 percent growth this year, down from 7.7 percent forecast last month.

“The fall in the index is in line with our view of growth momentum fading further in the coming quarters,” Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said in a note today. His estimate for today’s PMI was 47.5, the lowest in Bloomberg’s survey.

Tim Condon, head of Asian research at ING Groep NV in Singapore, said today’s report is “probably consistent” with 7 percent GDP growth.

Overcapacity Issues

Lack of efficient demand, overcapacity and small companies’ difficulties with labor costs and financing contribute to the uncertainty and pressure on growth, Zhu Hongren, spokesman for the Ministry of Industry and Information Technology, said at a briefing in Beijing today.

China banned government and Communist Party agencies from constructing new office buildings for five years and told them to suspend projects that have already won approval as the country seeks to cut wasteful spending. Agencies should ensure that limited government funds and resources are spent on developing the economy and improving the public’s well-being, according to a statement yesterday.

While government measures to curb official extravagance have dented retail sales this year, analysts at Mizuho Securities Asia Ltd. and Societe Generale SA said the latest move in connection with office construction wasn’t likely to have any significant impact on the economy. The funds can be directed to other, more productive uses, said Shen Jianguang, chief Asia economist at Mizuho in Hong Kong.

Shipyard Aid

China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s biggest shipyard outside state control, said this month it’s seeking financial help from the government as orders plunged.

The National Bureau of Statistics and China Federation of Logistics and Purchasing release their own PMI survey, with a bigger sample size, on Aug. 1. The official PMI in June was 50.1, down from 50.8 in May.

Japan today reported weaker growth in exports to China in June, a 4.8 percent gain from a year earlier after an increase of 8.3 percent in May, highlighting the potential for a Chinese slowdown to reverberate around the region. Figures on new-home sales and mortgage applications are due in the U.S.

China on July 20 eliminated the lower limit on lending rates offered by the nation’s financial institutions as economic growth slows and authorities expand the role of markets. The central bank acknowledged that it was a limited step and said that freeing up deposit rates would be more important.

Exports unexpectedly fell 3.1 percent in June from a year earlier, the most since the global financial crisis. Industrial production rose a less-than-forecast 8.9 percent and factory-gate prices fell for a 16th month.

China’s gross domestic product rose 7.5 percent in April-to-June from a year earlier, down from 7.7 percent in the first quarter. Growth was the slowest in three periods and extended the longest streak of sub-8 percent expansion in at least two decades.