China Manufacturing Index Unexpectedly Drops

A Chinese manufacturing index unexpectedly fell to a three-month low as output gains eased and employment weakened, suggesting the world’s second-largest economy is vulnerable to a slowdown.

The preliminary reading of 50.5 for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics compares with a final figure of 50.8 in November and the 50.9 median estimate in a Bloomberg News survey of 11 analysts. A number above 50 indicates expansion.

Chinese stocks fell the most in a month as the report underscored the Communist Party’s warning last week that the economy faces “downward pressure.” Societe Generale SA said tight liquidity probably played a role, while central bank Governor Zhou Xiaochuan said borrowing costs may be “relatively high” after interest rates are liberalized, comments he made in an interview with Caijing magazine published today.

“The reading confirms our view that Chinese GDP growth is already decelerating,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. He forecasts 7.2 percent gross domestic product expansion in 2014, compared with 7.7 percent this year.

China’s benchmark Shanghai Composite Index fell 1.6 percent. The MSCI Asia Pacific Index of stocks was down 0.7 percent as of 5:24 p.m. in Tokyo.

The government at last week’s annual economic work conference set a 2014 growth target of 7.5 percent, the same as in 2013, Caixin reported today on its website. The goal may help ensure employment and a lower target would have hurt market expectations, Caixin said, citing a National Development and Reform Commission researcher it didn’t identify.

Official Release

The official announcement of the growth goal usually comes in March at the National People’s Congress.

The average yield top-rated companies from China pay for 10-year yuan debt has increased 58 basis points this quarter to 6.24 percent. High borrowing costs have resulted from large demand, Zhou, head of the People’s Bank of China, said in comments that Caijing reported on its website today, citing a Dec. 6 interview.

A property bubble may pose another risk to growth. “I have no doubt that we see bubbles arising in the current China economy,” bubbles similar to ones seen in the West, former U.S. Federal Reserve Chairman Alan Greenspan told a Beijing forum today via videoconference, without mentioning the type of asset causing concern. Financial bubbles have been inevitable “in the wake of protracted periods of economic and financial stability,” he said.

Flash PMI

Today’s China report, known as the Flash PMI, is based on 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers. The final reading will be released on Jan. 2.

The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own survey of purchasing managers on Jan. 1. The gauge’s November reading was 51.4, the same as October, which was an 18-month high.

Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement today that the December figure is still higher than the average reading in the third quarter, “implying that the recovering trend of the manufacturing sector starting from July still holds up.”

Measures of new orders and export orders strengthened, while input prices increased at a slower rate, according to today’s report. The data were collected from Dec. 5-12, compared with last month’s survey from Nov. 12-19.

Wang Tao, chief China economist at UBS AG in Hong Kong, said the figures shouldn’t be “over-interpreted,” in part because of the earlier dates, as she maintained her forecasts for 7.6 percent GDP growth this quarter and in 2014.

Export Skepticism

Weakness in today’s manufacturing data adds to concerns that November’s official export numbers may have been inflated, said Tim Condon, head of Asia research at ING Groep NV in Singapore, who previously worked for the World Bank. Outbound shipments rose 12.7 percent last month from a year earlier, according to customs data last week.

Top party and government officials held the annual Central Economic Work Conference last week to map out policies for next year. A report issued after the meeting said policy makers will try to stabilize expansion, restructure the economy and promote reforms.

Leaders also pledged to maintain continuity and stability in macroeconomic policies in 2014 and stick to a prudent monetary policy and proactive fiscal policy. They also vowed to tackle local government debt.

Expand Market

Separately, the State Council said it will expand the over-the-counter stock market to ease financing difficulties for small and medium-sized enterprises and expand channels for private investment. Such businesses may find it difficult to get loans from banks who prefer to issue credit to state-owned companies.

Higher costs and wages in China are prompting some companies to set up manufacturing in neighboring Asian economies. Samsung Electronics Co., the world’s biggest smartphone maker, is building a $2 billion plant in Vietnam that may make 120 million handsets a year by 2015, according to two people familiar with the company’s plans who asked not to be identified because the matter is private.

Separately today, large Japanese businesses pared their projections for capital spending in the fiscal year ending March 2014, according to a quarterly Bank of Japan report. Markit PMI gauges for France showed manufacturing and services weakened.