Bloomberg News

China Services Slowdown Boosts Speculation Tightening May Ease

July 04, 2011

July 4 (Bloomberg) -- China’s non-manufacturing industries expanded at the slowest pace in four months in June, sending stocks higher on speculation the government may ease monetary tightening policies aimed at taming inflation.

A purchasing managers’ index dropped to 57 from 61.9 in May, the China Federation of Logistics and Purchasing said on its website yesterday. A reading above 50 indicates expansion.

The Shanghai Composite Index rose 1.7 percent, extending a two-week rally, as expectations climbed that the government will refrain from raising interest rates and ease some lending restrictions due to slowing growth in manufacturing and services. Vice Premier Wang Qishan urged banks to increase financing to small companies that are having problems raising funds, according to a statement yesterday from the State Council.

The rise in stock prices today “may be due to increased expectation for policy relaxation”, said Mingchun Sun, Hong Kong-based head of China Research of Daiwa Capital Markets. Even so, “China may still need to raise interest rates before it halts on any further tightening” because inflation will remain high and is unlikely to drop below the government’s 4 percent target before November, he said.

The Shanghai Composite Index gained 1.7 percent to 2,805.5 at 1:46 p.m. in Beijing.

The domestic and global situation is “extremely complicated and uncertain”, making it more difficult for the government to strike a good balance between economic development and curbing inflation, Vice Premier Wang said.

Micro-Financing

Wang said micro-financing institutions should be developed to help small companies raise funds.

“The survival and development of small companies are directly linked to employment growth, economic transition, and social stability,” Wang said during a trip to the northern province of Hebei, according to the State Council.

The government is also boosting investment in affordable housing to help sustain demand for steel and cement amid a slowdown in manufacturing growth. The government aims to start building 10 million low-income housing units this year, as part of the target set by Premier Wen Jiabao to construct 36 million units during the next five years.

Slowing manufacturing “caused a reaction in producer services,” Cai Jin, the Federation’s president, said in yesterday’s statement. “The index level still shows China’s non- manufacturing industries are maintaining quite quick growth. Affordable housing construction has accelerated,” he said.

Easing Home Prices

The non-manufacturing PMI is based on data from 20 industries including real estate, transport, retailing, catering and software. China’s home prices eased in eight of the country’s 10 biggest cities in June as the government expanded efforts to curb the risk of asset bubbles in its housing market, SouFun Holdings Ltd. said July 1.

“The slowdown is a result of the Chinese government’s tightening measures to curb inflation,” said Shen Minggao, Hong Kong-based head of China research at Citigroup Inc. “The government is expected to continue the current measures at least in July as inflation is still high.”

The central bank has raised reserve requirements 12 times and interest rates four times since the start of last year to tame inflation that reached a 34-month high of 5.5 percent in May. The People’s Bank of China has paused for 13 weeks in raising benchmark interest rates, the longest gap since increases began in October.

Stocks ‘Oversold’

Chinese stocks are “oversold” as concerns such as bank loans to local government financing vehicles and the slowdown in the real estate industry are being factored in by investors, Shen said in a phone interview yesterday.

Inflation may climb to 6.5 percent in June because of surging pork prices, according to Shenyin & Wanguo Securities Co. The People’s Bank of China may increase borrowing costs around the time of the release of June economic data, scheduled for July 15, Shenyin & Wanguo, ranked China’s most influential research provider by New Fortune magazine last year, said in a June 30 report.

As the tightening continues, “we may see more of a slowdown in consumption in industries including real estate and auto,” Citigroup’s Shen said.

--Victoria Ruan, Jing Jin, Henry Sanderson. With assistance from Paul Panckhurst, Nerys Avery, Huang Zhe and Penny Peng. Editors: Ken McCallum, Nerys Avery

To contact Bloomberg news staff for this story: Jing Jin in Shanghai at jjin32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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