Bloomberg News

Manufacturing Slowdown Aids Asia’s Campaign to Cool Prices

September 01, 2011

(Updates with comments by Chinese central bank official in eighth paragraph.)

Sept. 1 (Bloomberg) -- Chinese export orders fell for the first time in two years in August, and manufacturing in South Korea and Taiwan contracted, underscoring signs of slowing growth that may help dissipate Asian inflation pressures.

An index of Chinese manufacturing was at 50.9, near a 29- month low, the China Federation of Logistics and Purchasing reported today. Similar gauges for South Korea and Taiwan were at 49.7 and 45.2, below the expansion-contraction point of 50, data compiled by HSBC Holdings Plc and Markit Economics showed.

“Slowing growth will ease some of the demand-side pressures across Asia” on consumer prices, said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “Our sense is that central banks in Asia are basically done with their monetary policy tightening,” with Taiwan and India among the few that may still raise interest rates, he said.

Inflation, which in South Korea reached a three-year high in August, has eroded consumers’ purchasing power across Asia, spurring protests from China to India. Any lasting sign of moderation in consumer prices may let some central banks shift toward considering an easing in policy, following Brazil’s interest-rate cut yesterday, said Tim Condon, head of Asia research at ING Groep NV in Singapore.

“We have seen the worst and inflation will slowly subside,” said Condon. “Some may even be thinking if they can ease monetary policy to stimulate the economy.”

Stocks Gain

Stocks rose, with the MSCI Asia Pacific index advancing 0.7 percent, heading for a sixth straight session of gains. South Korea’s Kospi index closed little changed after government figures showed consumer prices increased 5.3 percent in August. The Bank of Korea meets next week to set interest rates.

China’s Purchasing Managers’ Index report, based on a survey of more than 820 companies in 20 industries, showed the weakest export-orders reading since March 2009. A separate gauge released by HSBC and Markit indicated a second straight contraction in Chinese manufacturing.

Li Dongrong, an assistant governor at the People’s Bank of China, said today that global liquidity, labor costs and resource pricing reforms are contributing to price pressures, which remain “controllable.” He spoke at a forum in Beijing.

Raw-Material Prices

Angang Steel Co., the largest Hong Kong-traded Chinese steelmaker by market value, said last week first-half profit tumbled 91 percent because of slowing demand from automakers and higher raw material costs. Shares in Geely Automobile Holdings Ltd., whose parent owns Volvo Cars, fell to their lowest in almost two years in Hong Kong trading on Aug. 22 after saying demand for vehicles in China is showing signs of slowing.

In Korea, LG Display Co., the world’s second-largest maker of liquid-crystal displays, may cut spending next year as slowing flat-screen television sales damp demand, Chief Executive Officer Kwon Young Soo said last month. Samsung Electronics Co. reported an 18 percent drop in profit for the second quarter.

South Korean industrial production fell 0.4 percent in July from the previous month, a government report showed yesterday. Japan, Asia’s second-largest economy, saw output rise 0.6 percent, less than half the median estimate for a 1.4 percent advance in a Bloomberg News survey of economists.

‘Highly Susceptible’

“There is little to suggest that large parts of Asia remain anything other than highly susceptible to growth developments in the U.S. and Europe,” Credit Suisse Group AG economists, including Robert Prior-Wandesforde in Singapore, wrote in a note today.

U.S. reports later this week are forecast to show manufacturing shrank in August and the unemployment rate held at 9.1 percent, according to the Bloomberg survey median estimates. In Europe, where policy makers have yet to contain a sovereign debt crisis that erupted two years ago in Greece, confidence in the economic outlook slumped the most since 2008 in August.

Chinese Premier Wen Jiabao signaled yesterday that a faltering global recovery and turbulence in financial markets have yet to convince the government to switch from a focus on taming inflation. In the latest tightening, the central bank will expand banks’ reserve requirements, starting from Sept. 5.

Wen said the slowdown in the economy is “reasonable” and within government expectations, according to an article he wrote in Qiushi, the magazine of the ruling Communist Party.

‘Soft Landing’

“The economy is heading towards a soft landing but uncertainties are looming, which means policy makers may not want to tighten monetary policy further,” said Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch. “Fiscal policy may be more proactive to support areas such as small and medium-sized enterprises.”

In the Philippines, data this week showed growth slowed for a fourth straight quarter, with gross domestic product increasing 3.4 percent from a year earlier, compared with a 4.6 percent gain in the three months through March. President Benigno Aquino has pledged to boost growth to as much as 8 percent annually.

Inflation, which accelerated to a 26-month high of 5.2 percent in June, has already starting coming down in the Philippines with consumer prices projected to increase the least since January in August. Higher costs have hurt profits at companies including Jollibee Foods Corp., the nation’s largest restaurant operator, and food company RFM Corp., which said in July it may miss its earnings target this year.

Extended ‘Pause’

Bank of America Merrill Lynch economists, paring their projections for tighter monetary policy in Asia in an Aug. 26 research note, said they “expect most central banks in Asia to remain on pause until 2012.” India and Thailand may still boost borrowing costs, they said.

Thailand saw inflation accelerate in August, with a 4.29 percent year-on-year rate that was the highest since 2008, government figures showed today.

India’s benchmark wholesale-price inflation rate has stayed above 9 percent since the start of December and was 9.22 percent in July after the government allowed state-run companies such as Indian Oil Corp. to increase diesel costs.

--With assistance from Li Yanping and Zheng Lifei in Beijing. Editors: Chris Anstey, Stephanie Phang

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net;

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


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