China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories.
The Purchasing Managers’ Index fell to 51.2 from 52.1 in June, the Federation of Logistics and Purchasing said on its website today. That was less than the median forecast of 51.4 in a Bloomberg News survey of 15 economists. A reading above 50 shows an expansion.
A deeper Chinese slowdown could weaken a global recovery already constrained by the debt burdens and unemployment of advanced economies. While growth is cooling, China’s full-year expansion may be as much as 9.5 per cent, up from 9.1 per cent in 2009, State Council researcher Zhang Liqun said today.
“The Chinese economy is slowing down mainly due to the ongoing property tightening measures,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. “Beijing will surely ramp up spending on public housing and other public works to stabilise growth.”
The US economy, the world’s biggest, grew at a slower pace in the second quarter as unemployment capped consumer spending, the government reported July 30. From the UK to Japan, government efforts to cut debt may weigh on demand after stimulus spending revived the global economy.
Heavy industry
Today’s PMI was the lowest since China’s manufacturing stopped contracting in March 2009. An output index fell to 52.7 from 55.8 in June. A measure of new orders slid to 50.9 from 52.1. An export-order index fell for a third month, dropping to 51.2 from 51.7. Of 11 sub-indexes, only the measure of employment gained, climbing to 52.2 from 50.6.
At Morgan Stanley, economist Wang Qing said the slowdown seemed concentrated in heavy industry, partly reflecting a government campaign to close inefficient businesses to meet energy-saving goals. This “does not necessarily reflect weakening in the underlying economic fundamentals,” he said.
The PMI, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.
‘Inventory Correction’
China’s industrial-output growth cooled in June by the most since 2008.
Today’s data showed contractions in indexes of stocks of raw materials and finished goods, suggesting “a quite aggressive inventory correction” as business confidence weakens, said Tao Dong, a Hong Kong-based economist at Credit Suisse AG.
Investors may be betting that the government will alter policies if necessary to sustain the pace of growth. The Shanghai Composite Index climbed 10 per cent in July. That was the biggest gain in a year and pared this year’s decline in the benchmark to 20 per cent.
Societe Generale SA cautioned last week that seasonal distortions in Chinese surveys raised the risk of a PMI below 50. Goldman Sachs Group Inc. said today that such effects typically drag down the July number and Australia & New Zealand Banking Group Ltd. said the index has reached “a cyclical bottom” and may rebound.
‘Appropriate’ Liquidity
Government measures this year, including trimming credit growth from last year’s record $1.4 trillion and discouraging multiple-home purchases, have reduced overheating risks in the fastest-growing major economy.
The central bank said today it will further improve management of liquidity in the banking system in accordance with the government’s full-year lending and money supply targets. The People’s Bank of China will keep liquidity at an “appropriate” level by “reasonably” combining open-market operations and tools such as the required reserve ratio, according to a statement posted on its website.
Property Prices
Growth dipped to a 10.3 per cent annual pace in the second quarter from 11.9 per cent in the first quarter and property- price gains have cooled from April’s record. The government will “strictly” enforce home mortgage policies to promote a healthy and stable real estate market, according to today’s central bank statement.
A moderation in growth “is a desirable result, which will lower expectations for further policy tightening,” said Xing Ziqiang, a Beijing-based economist at China International Capital Corp.
Vale SA, the world’s largest iron-ore producer, has a similar view, with Chief Financial Officer Guilherme Cavalcanti telling reporters on July 30 that the nation’s expansion has moved to “a more sustainable pace.”
China, the world’s biggest exporter, has been buoyed this year by demand for shipments climbing to pre-crisis levels and even beyond.
“If exports hold up, China’s slowdown should be moderate and not require a reversal of policy,” Brian Jackson, an emerging markets strategist for Royal Bank of Canada, said today. “But if weakness in the euro-area and the U.S. does major damage to Chinese exports, Beijing will likely face pressure to deliver a renewed surge in investment spending.”
Energy-Efficiency Targets
UBS AG economist Wang Tao said last week that economic growth could be cut by 2 percentage points in the second half of the year if the government shows “true resolve” in meeting its energy-efficiency target. The goal is in a five-year plan that has only months to run.
Soured loans also have the potential to limit growth. Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, a person with knowledge of data collected by the nation’s regulator said last month.
