Chinese Manufacturing Gauges Drop as Xi Deals With Risk

Chinese manufacturing indexes fell in December, underscoring challenges for President Xi Jinping as he tries to sustain growth in the world’s second-largest economy while rolling out reforms.

A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics fell to 50.5 from 50.8 the previous month, according to a statement today, and a separate gauge compiled by the statistics bureau and logistics federation released yesterday declined to 51 from 51.4. Measures of manufacturing in the U.S. and Europe will be released later today.

Swelling local-government debt, surging property prices in some cities and volatility in money-market rates are risks as Xi embarks on reforms intended to lay the foundation for more sustainable long-term growth. Gross domestic product may have expanded 7.6 percent in 2013, the slowest pace in 14 years, according to a State Council report last week.

The PMI readings “confirm our view that growth momentum has peaked and will continue slowing,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. “China’s GDP growth will decelerate to 7.2 percent this year, more than expected, which will weigh on many regional asset prices.”

Shares in China fell after the HSBC report. The benchmark Shanghai Composite Index was 0.4 percent lower at the 11:30 a.m. break. Mainland stocks traded in Hong Kong declined, with the Hang Seng China Enterprises Index down 1.3 percent as of 11:13 a.m. The Shanghai index fell about 7 percent in 2013, the third decline in four years, as rising money-market rates and slowing growth fueled investor concern that corporate profits will decline.

Stable Growth

In 2013, GDP may have climbed 7.6 percent, according to the State Council report. While that would exceed the government’s 7.5 percent target, it would also be the slowest pace since 1999 when the gain was 7.6 percent. Expansion may fall to 7.4 percent in 2014, according to the median estimate of 48 economists in a Bloomberg News survey last month.

“The Chinese leadership has made it clear that they want stable growth this year -- neither a sharp fall nor a quick rebound,” said Zhu Haibin, Hong Kong-based chief China economist at JPMorgan Chase & Co., who spoke before today’s report. “The central bank will remain neutral in its policy operations.”

Weaker Orders

Today’s reading from HSBC was the weakest in three months and was the same as the preliminary number released Dec. 16. The official PMI released yesterday slipped to a four-month low and trailed the median 51.2 estimate in a Bloomberg survey of 29 economists. A number above 50 indicates expansion.

Gauges of output and new orders rose at a weaker rate in the HSBC and official PMIs. Both surveys showed new export orders dropped below the 50 mark that separates expansion from contraction and the employment measure in the statistics bureau’s index fell to the weakest reading since June.

The PMIs for large, medium and small enterprises all dropped in the official survey, “suggesting a more broad-based deceleration in economic momentum,” Chang Jian, Hong Kong-based chief China economist with Barclays Plc said in a note yesterday.

The statistics bureau and logistics federation will tomorrow release their non-manufacturing PMI survey for December and HSBC will publish its services index on Jan. 6, giving a broader picture of the strength of the economy. Service industries accounted for about 45 percent of GDP in 2012, according to statistics bureau data, and the government is seeking to increase the share to 47 percent by 2015.

’Decisive’ Role

A key task for Xi this year will be overseeing the broadest economic changes since the 1990s, spelled out at the Communist Party Central Committee’s Third Plenum in November. Shifts include letting markets play a “decisive” role in allocating resources, increasing property rights for farmers and encouraging private investment in more industries.

The government pledged last month to tackle local government debt in 2014 as concerns rise the issue will increase risks to the financial system. Such debt, including contingent liabilities, rose to 17.9 trillion yuan ($2.96 trillion) as of the end of June, the National Audit Office said in a report this week.

“We continue to look for slower growth in the coming months,” Chang Jian said today. Factors that will weigh on growth include reducing overcapacity, controlling local government debt and weaker corporate sentiment due to higher funding costs as market interest rates rise, she said.

Hoarding Cash

The seven-day repurchase rate averaged an unprecedented 4.65 percent in the three months that started Oct. 1, up from 3.2 percent in the first quarter. The rate more than doubled to 8.84 percent on Dec. 23 from Dec. 12 as banks hoarded cash to meet year-end regulatory requirements.

Last month’s cash crunch in the interbank market, the worst since June, is forcing Chinese companies to sell bonds at the highest yield since the 1997 Asian financial crisis. Evergreen Holdings Group Co., an AA- rated shipbuilder with 16.5 billion yuan of debt, sold one-year notes at 9.9 percent on Dec. 6, the highest among publicly issued onshore bonds since 1997, according to data compiled by Bloomberg. Fujian San’An Group Co., graded AA, issued similar-maturity securities at 9.4 percent on Dec. 10.

Housing prices are also challenging the government. A central bank survey last month showed two thirds of 20,000 households polled said property prices are “high and unacceptable.” New home prices in December jumped by the most in 2013. In Beijing and Guangzhou, prices jumped 28 percent from a year earlier, according to SouFun Holdings Ltd.

— With assistance by Xin Zhou

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