Bloomberg News

China Manufacturing Contracts for Third Month, Survey Shows

September 30, 2011

(Updates with stocks in the fifth paragraph.)

Sept. 30 (Bloomberg) -- A gauge of Chinese manufacturing shrank for a third month, the longest contraction since 2009, as measures of new orders and export demand declined.

The reading of 49.9 for the September purchasing managers’ index, released by HSBC Holdings Plc and Markit Economics today, was unchanged from August and compared with a preliminary 49.4 figure published last week. The gauge was below 50, the level that separates expansion from contraction, for eight months through March 2009.

Government curbs on lending and the real-estate industry to damp inflation are slowing growth in demand in the world’s second-largest economy. A slump in global investor confidence and heightened risks of recession in the U.S. and euro area economies are also weighing on the outlook for exports.

Today’s data “suggests the slowdown in China’s manufacturing sector is stabilizing,” said Qu Hongbin, an economist at HSBC in Hong Kong. “Slowing global demand will start to weight on growth soon, but resilient domestic consumption and investment should prevent a sharp output slowdown.”

Stocks in China extended their decline after the PMI data was released. The benchmark Shanghai Composite Index was 0.4 percent lower at 2,356.48 at the 11:30 a.m. break. The gauge is set for its biggest quarterly drop since the three months through June last year amid concerns that slowing growth in China and overseas will hurt earnings.

Growing Risks

Releases later today may show U.S. consumer spending slowed and German retail sales fell, increasing concern that growth in developed economies is stalling. Industrial output in Japan and South Korea rose less than estimated in August, reports today showed.

The International Monetary Fund last week cut its forecasts for global growth this year and next and said “downside risks are growing” as Europe’s debt crisis widens. A Bloomberg survey of global investors released yesterday showed about three- quarters anticipate the euro region will fall into a recession during the next 12 months.

HSBC said today that while gauges of new orders and export orders continued to contract, they were higher than in August. A measure of output expanded for the second month after contracting in June and July.

Inflation Priority

Respondents to the survey said they continued to pass on increased costs to customers, HSBC said, indicating inflationary pressure hasn’t abated. The sub-index of input costs rose to a four-month high and a gauge of output prices also climbed, it said.

Policy makers including Premier Wen Jiabao reiterated this month that stabilizing prices remains their top priority even as inflation eased to 6.2 percent in August from a three-year high in July. Increases in consumer prices have exceeded the government’s 2011 target of about 4 percent every month.

The HSBC index reading “shows gloomy hard landing rumors can be excluded,” said Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd.

A separate purchasing managers’ index due tomorrow from the National Bureau of Statistics and the China Federation of Logistics and Purchasing will climb to 51.1 from 50.9 in August, according to the median estimate in a Bloomberg News survey of 13 economists. The reading hasn’t dropped below 50 since February 2009.

‘Good Buffer’

HSBC’s index, which surveys more than 400 companies, is weighted toward small businesses that have been hit harder by the government’s tightening measures, according to economists including Bank of America Corp.’s Lu Ting and ANZ’s Liu. The official PMI, which questions more than 800 companies in 20 industries, has a greater focus on larger enterprises, they say.

The combination of both readings “offers a balanced outlook on China’s economy,” Liu said. “Companies, especially state-owned enterprises, are showing earnings growth and this will provide them with a good buffer to weather the global difficulties.”

TCL Corp., the nation’s largest publicly traded consumer- electronics maker, forecast profit in the first nine months of the year will rise by as much as 335 percent from a year earlier on higher sales of televisions, smartphones and home appliances, according to a Sept. 25 filing to the Shenzhen stock exchange.

China’s economic growth slowed to 9.5 percent in the second quarter from the same period a year earlier, after a gain of 9.7 percent in the previous three months. HSBC’s Qu said he expects expansion to “hold up” at around 8.5 percent to 9 percent in the coming quarters.

--Li Yanping, with assistance from Ailing Tan in Singapore and Regina Tan and Nerys Avery in Beijing. Editors: Nerys Avery, Lily Nonomiya

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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