Bloomberg News

China Manufacturing May Contract a Third Month, Survey Shows

September 22, 2011

(Updates with stocks reaction in fifth paragraph, export orders in seventh paragraph.)

Sept. 22 (Bloomberg) -- China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined.

The reading of 49.4 for a manufacturing index released by HSBC Holdings Plc and Markit Economics today compares with a final reading of 49.9 for August and 49.3 for July. The reading was below 50, the level that separates expansion from contraction in the eight months through March 2009, according to previously released figures.

Today’s data adds to evidence the world’s second-biggest economy is slowing after the central bank raised borrowing costs and curbed lending to cool inflation. China has joined policy makers in other Asian economies including South Korea and Malaysia in limiting monetary tightening as a deepening debt crisis in Europe and the risk of renewed recession in the U.S. threaten to stall a global recovery.

“The index points to continued moderation in manufacturing growth,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the World Bank. “But the fact that the number is hovering around 50 should reduce concerns over a sharp slowdown and which would support the authorities in keeping their current policy stance largely in place.”

Slowdown Concern

Stocks in China extended their decline after the data were released. The benchmark Shanghai Composite Index was 1.7 percent lower at 2469.36 at the 11:30 a.m. local-time break. The gauge has slumped 12 percent this year as the government tightened policies to cool inflation and concern deepened that faltering growth in developed economies will sap export demand.

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. The final reading will be released on Sept. 30.

A gauge of output dropped below 50 in September after expanding the previous month, orders contracted at the same rate and a measure of new export orders contracted at a faster pace, today’s statement showed. Sub-indexes for output prices and input costs rose at a faster pace compared with August, today’s report showed, indicating inflationary pressure hasn’t abated.

The preliminary index has matched the final reading twice since HSBC began publishing the series in February. The index fell below 50 in July for the first time in a year. The official manufacturing index released by the statistics bureau and the China Federation of Logistics and Purchasing had a reading of 50.9 in August.

Hard-Landing Fears

A final reading below 50 for the third month “implies that China’s manufacturing sector will see weakening sequential growth in the coming months,” Qu Hongbin, a Hong Kong-based economist at HSBC, said. “Fears of a hard landing are unwarranted” as the nation is less dependent on overseas sales than during the last crisis and domestic investment and consumer spending are “resilient,” he said.

In contrast, Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets Ltd. said he’s “extremely concerned” about the outlook for the economy. Concerns the economy will experience a hard landing “are not unwarranted,” he said.

Downside Risks

Economists including Shen Jianguang at Mizuho Securities Asia Ltd. and Lu Ting at Bank of America Merrill Lynch have said the HSBC PMI focuses on small and medium-sized companies that have been affected more than state-owned enterprises in the government’s tightening campaign.

The official PMI, which surveys more than 800 companies in 20 industries, hasn’t dropped below the 50 line that divides expansion from contraction since February 2009.

The International Monetary Fund this week cut its forecast for global growth to 4 percent for 2011 from a June estimate of 4.3 percent, and said “downside risks are growing” as Europe’s debt crisis widens. The Washington-based lender also lowered its estimate for China’s expansion because of monetary tightening and a weaker outlook for exports.

The IMF now projects the Chinese economy will grow 9.5 percent this year, down from a forecast of 9.6 percent in June, and 9 percent in 2012.

Premier Wen Jiabao said this month the slowdown is within the government’s expectations and that stabilizing prices remains the top economic priority.

Mixed Outlook

A central bank survey last week showed inflation expectations among households rebounded in the third quarter even as August consumer-price gains eased to 6.2 percent from a three-year high in July.

Signs are mixed on the outlook for the economy. While industrial output growth moderated in August for the second straight month, exports grew more than expected and imports climbed to a record, indicating demand is holding up.

Rio Tinto Plc, the world’s second-largest mining group, said this week that “a policy-induced hard landing remains unlikely” and that the long-term outlook for demand from China is “positive.”

--Li Yanping, Zheng Lifei. With assistance from Ailing Tan in Singapore, Huang Zhe and Regina Tan in Beijing. Editors: Nerys Avery, Ken McCallum

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

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


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