China Manufacturing Index Signals Surprise Contraction

China’s manufacturing may contract for the first time in six months, adding to stresses in the world’s second-biggest economy, according to a gauge released by HSBC Holdings Plc and Markit Economics.

The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released today was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey. A number above 50 indicates expansion.

Asian stocks and the Australian dollar extended losses as the data pointed to weakening domestic and global demand. While Bank of America Corp. cautioned that figures may have been distorted by workers’ holidays ahead of the Lunar New Year, a manufacturing slowdown would add to strains that include elevated interest rates and the risk of defaults on high-yield investment products.

“The policy focus should tilt towards supporting growth,” Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement. Today’s report “implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth,” Qu said.

The MSCI Asia Pacific Index of stocks was down 1.1 percent as of 3:59 p.m. in Tokyo, while the Australian dollar slid 0.7 percent to 88.08 U.S. cents. China’s benchmark Shanghai Composite Index of stocks fell 0.4 percent.

The PMI reading is “really dramatic,” Hu Yifan, chief economist at Haitong International Securities Co. in Hong Kong, said in a Bloomberg Television interview. Rising funding costs are adding difficulties and the official PMI will also show a “continued declining trend,” she said.

Factory Output

Signs in the PMI of a contraction don’t indicate that manufacturing is shrinking on an annual basis. Factory output rose 9.7 percent in December from a year earlier, compared with a 10 percent pace in November, statistics bureau data showed this week.

Industrial & Commercial Bank of China Ltd. and China Credit Trust Co. may together with the government bail out investors in a troubled trust that sparked concern of defaults on high-yield investment products, according to the Time-Weekly newspaper. ICBC and China Credit Trust may each take responsibility for 25 percent of payments for the 3 billion-yuan ($496 million) trust, the newspaper reported on its website today, citing a person it didn’t identify.

The manufacturing report gives one of the first indications of the economy’s performance in 2014 after data earlier this week showed gains in factory output eased last month, sapping momentum as a credit clampdown adds pressure on the outlook.

Growth Target

Economic growth slowed to 7.7 percent in the fourth quarter from 7.8 percent in the July-September period, according to Jan. 20 figures from the statistics bureau. This year’s target for growth is yet to be announced, after a goal of 7.5 percent expansion in 2013.

The nation’s vehicle sales growth may slow this year to 8 percent to 10 percent from 14 percent in 2013, the China Association of Automobile Manufacturers said Jan. 9. Geely Automobile Holdings Ltd., the Chinese automaker whose parent owns Volvo Cars, sold fewer cars than it targeted in 2013, and forecast sales growth will slow to about 6 percent this year from 14 percent last year.

Today’s report, known as the Flash PMI, is based on 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers. Economists’ projections ranged from 50.1 to 50.8, with a median of 50.3. The final reading will be released on Jan. 30.

Official Index

The National Bureau of Statistics and China Federation of Logistics and Purchasing release their own survey of manufacturing purchasing managers on Feb. 1. The gauge’s December reading was 51.0, a four-month low and down from November’s 51.4.

The government will wait for signals from its own PMI and indicators such as industrial production and electricity over the next few months before loosening monetary policy by mid-year, with the central bank likely to lower banks’ reserve requirements by 50 basis points, Nomura Holdings Inc. said in a note today.

Growth is forecast to slow this year to a 24-year low of 7.4 percent, based on the median estimate of 50 analysts in a Bloomberg News survey from Jan. 17 to Jan. 22.

Gains in industrial production and manufacturing investment eased in 2013 from the previous year, while the government’s measure of services in gross domestic product surpassed that of manufacturing and construction for the first time since China opened its economy in the late 1970s, data showed this week.

A shrinking workforce may push up labor costs for Chinese manufacturers in coming years, while higher interest rates may squeeze factory owners’ margins. China’s working-age population, or people age 16 to 59, fell by 2.44 million in 2013, the statistics bureau said Jan. 20.

Markit will release additional preliminary PMI readings later today for France, Germany, the euro area and the U.S. The euro-area index is projected to have increased to 53.0 from 52.7 in December, based on the median estimate of economists.

— With assistance by Xiaoqing Pi

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