Bloomberg News

Asia Manufacturing Slows, Posing Rates Dilemma as Prices Rise

July 01, 2011

July 1 (Bloomberg) -- Manufacturing growth is slowing in Asian economies from China to South Korea, creating a dilemma for central bankers considering higher interest rates to combat inflation.

The Purchasing Managers’ Index by the China Federation of Logistics and Purchasing fell to the lowest level since February 2009, while a gauge by HSBC Holdings Plc and Markit Economics for India showed manufacturing in June grew at the slowest pace in nine months. South Korean exports rose the least in 20 months.

Europe’s debt crisis and slowing U.S. growth are damping demand for Asian goods, putting pressure on policy makers to delay further rate increases even as prices gain. Inflation quickened to the fastest pace since 2008 in China, exceeded 20 percent in Vietnam last month and prompted protests in India.

“We are seeing a global slowdown in growth so it may not be necessary for imminent tightening across the region,” said Frederic Neumann, co-head of Asian economic research in Hong Kong at HSBC. While the easing expansion may curb price pressures, “one big risk for Asia is that inflation remains more sticky than expected and that will reduce the scope for policy accommodation.”

Inflation pressures have prompted Asian central banks to be among the quickest to withdraw monetary stimulus as growth accelerated following the global recession in 2009. India, South Korea, Thailand and Taiwan raised their benchmark rates last month to contain rising prices, while China ordered lenders to set aside more cash as reserves.

China Manufacturing

The China Federation of Logistics and Purchasing said its Purchasing Managers’ Index was at 50.9 in June compared with 52 in May. Manufacturing, which accounts for about half of China’s economy, is moderating as government policies curb demand for housing and cars, power shortages crimp output and monetary tightening limits company funding.

The People’s Bank of China has paused for 12 weeks in raising benchmark rates, the longest gap since increases began in October. China’s inflation was 5.5 percent in May, exceeding the government’s annual target of 4 percent.

In South Korea, where export growth slowed to 14.5 percent in June from 22.4 percent in May and a purchasing managers’ index by HSBC and Markit Economics eased, consumer-price gains exceeded the central bank’s target for a sixth straight month in June. Prices rose 4.4 percent from a year earlier after a 4.1 percent increase in May, the country’s statistics department said today. The Finance Ministry yesterday cut its growth forecast for 2011 to 4.5 percent from 5 percent.

Indonesian Inflation

Thailand’s inflation held near a 32-month high in June after food prices increased, with consumer prices climbing 4.06 percent from a year earlier. In contrast, Indonesia’s inflation slowed for a fifth straight month in June.

A measure of India’s manufacturing output fell to 55.3 in June from 57.5 in May, according to the Purchasing Managers’ Index compiled by HSBC and Markit Economics. Price gains in the world’s second-most populous country may accelerate after the government last week raised the cost of diesel and cooking gas for the first time in a year. The Reserve Bank of India has raised interest rates 10 times since mid-March 2010.

Asia still relies on U.S. and European demand for its goods, even as Group of 20 nations push to rebalance the world economy so global growth depends less on such a relationship and more on domestic demand. Asian economies accounted for 35 percent of world exports in 2009, compared with 25 percent a decade earlier, according to the International Monetary Fund.

Europe Impact

The fallout from a European debt crisis would be the most severe for Hong Kong, Singapore, Vietnam and Malaysia, Tai Hui, head of Southeast Asian economic research at Standard Chartered Plc, said in a June 29 note.

“These economies would likely see the greatest impact on their headline growth due to the combination of their high exposure to external trade in general, and to European Union trade in particular,” Hui said. “Exporters in China, India and Vietnam would also face significant challenges since they have the largest trade exposure to the European Union.”

U.K. manufacturing grew at the slowest pace in almost two years in May as weak domestic demand led to a drop in production and new orders, a gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply last month. The June data is due today.

U.S. manufacturing probably expanded in June at a slower pace as shortages of parts and components from Japan prompted factories to limit production, a separate Bloomberg survey showed. The Institute for Supply Management’s manufacturing index is due today.

--With assistance from Zheng Lifei in Beijing, Eunkyung Seo in Seoul. Editors: Stephanie Phang, Cherian Thomas

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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