China Pledges to Keep Growth Within ‘Reasonable Zone’

China’s government pledged to prevent growth from slipping below a “reasonable” level as manufacturing gauges gave a mixed picture of the strength of the world’s second-biggest economy.

The nation “can’t blindly stimulate economic growth, nor can it allow economic growth to decelerate to a level out of the reasonable zone,” the State Council Information Office said in Beijing after a Purchasing Managers’ Index reading of 50.3 for July, up from 50.1 in June. A gauge from HSBC Holdings Plc and Markit Economics fell to 47.7, an 11-month low.

China stocks rose for a third day after the unexpected gain in the official index suggested progress toward arresting a slowdown that has put the nation’s 7.5 percent growth target for 2013 in jeopardy. Bank of America Corp. said today that comments from Premier Li Keqiang have signaled that the goal is this year’s floor, a commitment that may already have improved sentiment and the economic outlook.

“Since mid-July, Premier Li has made it very clear that his government will try to achieve the 7.5 percent growth target, with some policy easing measures including more investment in infrastructure,” said Lu Ting, a Hong Kong-based economist for Bank of America. The government is likely to rely on fiscal measures, while avoiding monetary easing, Lu said.

Both surveys showed businesses cutting workers and weakness in export orders, indicating that the government may need to do more to stabilize the economy. Separately today, a report from the central bank showed that the nation’s foreign-exchange reserves, the world’s biggest, fell in June from May. Li is trying to sustain growth after a June cash squeeze jolted banks.

‘Serious Overcapacity’

The government statement highlighted risks from local-government debt and said “serious overcapacity” exists in industries such as steel and cement. While the nation’s potential growth rate has fallen to a range of between 7 percent and 8 percent, China hasn’t slowed as much as Russia or India and will remain a key engine of the global economy, the State Council Information Office said.

The Shanghai Composite Index rose 1.1 percent as of 2:11 p.m. local time. The MSCI Asia Pacific Index of stocks gained 1.3 percent.

Estimates of 35 analysts for today’s official PMI released by the National Bureau of Statistics and China Federation of Logistics and Purchasing ranged from 49.2 to 50.1, according to a Bloomberg News survey. The median was 49.8.

‘Puzzling’ Number

The government PMI increase prompted skepticism among some analysts. Nomura Holdings Inc. said in a note that while the HSBC index “tends to cover more exporters and smaller firms,” the increase in the official PMI was “puzzling given the liquidity squeeze and sharp declines” in credit and monetary growth in June.

Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, said the government number “further casts doubt on the reliability of this official forward-looking indicator.”

Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, said the “bottom line is that there is a signal of improvement in the official reading, confirmed by an across-the-board uptick for almost all sub-indexes, and in any case government stimulus will lead to further improvement later in the second half” and a rebound in economic growth by the fourth quarter.

The official sub-index for employment was at 49.1, below 50 for a 14th month though up from June’s 48.7. HSBC, meanwhile, said the rate of job losses in manufacturing was the fastest since March 2009.

Sample Sizes

The statistics bureau and logistics federation increased the number of companies in their survey to 3,000 from 820 starting from January. The HSBC report is based on responses from purchasing managers at more than 420 businesses, and is weighted more toward smaller private companies.

The strengthening of the official gauge is “still very modest given the backdrop that smaller companies are still suffering,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “It’s still too early to say the economy is undeniably picking up. It’s still a very weak reading compared to historic levels.”

A subindex of new export orders rose to 49 in July from 47.7, as the government today restored some gauges that it omitted the previous month without explanation.

Great Wall Motor Co., China’s biggest maker of sport-utility vehicles, said July 23 it expects a 74 percent increase in first-half net income, citing higher sales and profit margins.

Factory Gauges

A South Korean manufacturing index slid to 47.2 in July from 49.4 in June, a separate report from Markit showed today. The latest readings of factory gauges will be released around the world today, including in the euro region and the U.S.

The Bank of England and the European Central Bank announce policy decisions today, after the U.S. Federal Reserve yesterday refrained from indicating when it may reduce $85 billion of bond purchases per month.

China’s overseas shipments unexpectedly fell 3.1 percent in June, the most since the global financial crisis. Exports to the U.S. and European Union declined for a fourth straight month.

Li said last week that the nation will speed railway construction, especially in central and western regions, according to the official Xinhua News Agency. He said at a recent meeting with economists that 7 percent expansion is the “bottom line” and the nation can’t allow growth below that, the Beijing News reported last week.

Last week, officials also announced a five-year ban on construction of new government buildings and cuts in excess manufacturing capacity in 19 industries.

The Chinese government set in March a 2013 growth goal of 7.5 percent and has a target for an average 7 percent expansion through 2015. 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, extending the longest streak of sub-8 percent expansion in at least two decades.

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