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China Case for Stimulus Builds as Manufacturing Weakens

August 22, 2012

China's Manufacturing May Contract at a Faster Pace

Employees work on the manufacture of construction machinery in Sany Heavy Industry Co.'s assembly shop in Changsha, Hunan Province, China. Photographer: Nelson Ching/Bloomberg

China’s manufacturing may contract at a faster pace in August, a private survey showed, signaling more monetary and fiscal stimulus may be needed to secure a second-half rebound in economic growth.

The preliminary reading was 47.8 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics, after July’s final 49.3 figure. If confirmed, it would be the weakest level since November and extend to 10 months the longest run of readings below the expansion-contraction dividing line of 50 in the index’s eight-year history.

Today’s data underscores risks that growth in the world’s second-biggest economy may slow for a seventh quarter, pushing the government to step up stimulus after two interest-rate cuts and accelerated investment approvals. Central bank Governor Zhou Xiaochuan yesterday said further rate adjustments can’t be ruled out while Shen Danyang, a Commerce Ministry spokesman, said last week that China’s trade situation will be “more grim” in the second half.

“Chinese producers are still struggling with strong global headwinds,” said Qu Hongbin, Hong Kong-based chief China economist for HSBC, said in a statement. “To achieve the stated policy goal of stabilizing growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months.”

The benchmark Shanghai Composite Index of stocks fell after the release, down 0.4 percent as of 10:37 a.m. local time.

Export Growth

China’s export growth collapsed to 1 percent in July from a year earlier after an 11.3 percent gain in June, while industrial production and lending missed economists’ forecasts, data released earlier this month showed.

China Rongsheng Heavy Industries Group Holdings Ltd. (1101), the country’s largest shipbuilder outside state control, this week reported an 82 percent drop in first-half profit and said it received orders for two vessels in the first half compared with 24 a year earlier.

Cotton consumption in China may shrink 11 percent this year as demand falters, Zhang Hongxia, chairman of Hong Kong-listed Weiqiao Textile Co. (2698), China’s largest cotton-textile maker, said in an interview this week. “The Chinese economy is only at the beginning of a harsh winter,” Zhang said.

The preliminary reading, called the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of more than 420 companies, according to HSBC. The final figure for August will be released Sept. 3.

Government Index

The government’s own index, due Sept. 1, had a July reading of 50.1, the weakest in eight months, and down from 50.2 in June.

A separate report today showed that a leading index for China’s economy rose in July after a little-changed June reading, according to the Conference Board, a New York-based research group.

Foreign direct investment in China declined 8.7 percent in July from a year earlier to $7.58 billion, the eighth drop in nine months and the smallest inflow since July 2010, a report last week showed. Chinese financial institutions sold a net 3.8 billion yuan ($600 million) of foreign currency in July, indicating capital outflows as property curbs and export weakness slow growth and the yuan weakens.

Rising property prices are complicating the government’s efforts to add stimulus. China’s new-home prices advanced in the largest number of cities in 14 months in July after interest- rate cuts and incentives for first-time buyers.

--Zhou Xin. Editors: Scott Lanman, Nerys Avery

To contact the reporter on this story: Xin Zhou in Beijing at

To contact the editor responsible for this story: Paul Panckhurst at

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