China Manufacturing Gauge Declines in Growth Headwind

A Chinese manufacturing gauge declined for the first time in four months, adding headwinds to a recovery in the world’s second-largest economy as leaders start to implement the broadest policy reforms since the 1990s.

The preliminary 50.4 reading for the November Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compared with a 50.8 median estimate from analysts surveyed by Bloomberg News. The final number for October was 50.9, and levels above 50 indicate expansion.

Slower manufacturing gains would add challenges for Premier Li Keqiang in carrying out a reform package that includes loosening controls on interest rates and giving farmers more land rights. Expansion headwinds may intensify after last month’s slowdown in credit growth that suggests Li is trying to contain financial risks.

“The recent growth rebound may have peaked,” said Ding Shuang, senior economist at Citigroup Inc. in Hong Kong. “Tighter credit conditions and reform measures will continue to weigh on investment and growth through next year,” and reforms may be slowed if the risk of expansion slipping below 7 percent “becomes material.”

The benchmark Shanghai Composite Index of stocks fell 1.2 percent at 1:21 p.m. in Shanghai, while the MSCI Asia Pacific Index was down 0.6 percent. The Australian dollar declined against the U.S. dollar.

The final reading of the HSBC-Markit manufacturing PMI will be released on Dec. 2. The National Bureau of Statistics publishes its own PMI survey, with a bigger sample size, on Dec. 1.

Analyst Projections

Estimates for the HSBC-Markit preliminary, or Flash, PMI, from 18 analysts ranged from 50.4 to 51.7. The gauge is based on 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers.

Output expanded at a faster pace while new orders rose at a slower pace, according to HSBC’s statement. Gauges of new export orders, employment and output prices showed contraction while input prices rose at a slower pace.

The Communist Party last week unveiled policy shifts after a four-day summit known as the third plenum. The dozens of measures include gradually relaxing the residence-registration system in mid-sized cities, accelerating convertibility of the yuan and reducing price controls on water, oil, gas and power.

Given today’s figures, “resentment from vested interest groups resisting reforms will escalate,” said Steve Wang, Hong Kong-based chief China economist at Reorient Financial Markets Ltd.

Reform Pace

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said a growth slowdown this quarter won’t necessarily slow down reforms. Instead, it will help accelerate changes that boost domestic demand, including rules on rural property, residential registration and the one-child policy, while “leaving other reforms that are negative to growth in a later stage,” Shen said.

Gross domestic product growth rebounded to 7.8 percent in the third quarter from a year earlier, after a 7.5 percent pace in the previous three months. The median estimate in a Bloomberg survey of 34 economists last month was for fourth-quarter expansion of 7.6 percent.

October data released earlier this month showed industrial production unexpectedly accelerated, exports rose more than estimated and inflation stayed below the government’s target. At the same time, China’s broadest measure of new credit was lower than estimated, suggesting authorities are trying to keep shadow-banking risks in check.

Home Prices

A separate government report earlier this week showed new home prices in China’s four major cities rose last month by the most since January 2011, raising concern that a bubble is forming as a lack of new nationwide property curbs emboldens buyers.

Royal Bank of Scotland Group Plc maintained its outlook for 7.7 percent GDP growth this quarter and 8.2 percent in the first half of 2014. “On balance, the reforms, which received a clear mandate from last week’s Third Plenum, are more likely to be positive than negative for growth,” Louis Kuijs, RBS chief China economist in Hong Kong, wrote in a note today.

Elsewhere in Asia today, the Bank of Japan stuck with a pledge to expand the monetary base by 60 trillion yen to 70 trillion yen ($700 billion) a year. Singapore raised its growth forecast for 2013 after the economy unexpectedly expanded last quarter. Hong Kong will publish inflation figures for October.

Europe will see Markit PMI gauges for November in France, Germany and the euro area. In North America, the U.S. will give numbers on producer prices for October, while Mexico will report economic growth from a year earlier slowed in the third quarter, based on a Bloomberg survey of analysts.

— With assistance by Scott Lanman

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