China manufacturing at lowest in 2 years

Chinese manufacturing growth has fallen to its lowest level in more than two years, while soft data from India and South Korea have added to the picture of a slowdown in Asia after moves to tame inflation.

With price pressures still high, economists said that policymakers would be able to shift only gingerly from fighting inflation to supporting growth.

China’s official purchasing managers’ index – a key measure of the manufacturing sector – dropped to 50.9 in June, down from 52 a month earlier.

It was the lowest reading since February 2009 during the global financial crisis and also perilously close to dipping below the 50 line that would signal a contraction in industrial activity.

The weak PMI was an unwanted birthday gift for the Chinese Communist party, which celebrated its 90th anniversary on Friday.

Over the past few decades, the social contract has been for the population to accept a lack of political freedom so long as the government delivers high-speed growth.

Evidence that Asian economies are slowing more sharply than officials anticipated could prompt a pause in policy tightening, if not an outright loosening, in the second half of the year, analysts said.

“Most Asian policymakers will be a little more cautious given the soft patch in the global economy. And the fact that commodity prices have eased a bit gives them more room for patience,” said David Cohen with Action Economics in ­Singapore.

The World Bank forecasts 8.5% growth this year for developing countries in east Asia and 7.5% in south Asia, easily outstripping 2.2% growth for high-income countries globally.

Output and new orders in the Chinese official manufacturing survey all slowed sharply, but so did input prices, indicating that inflationary pressure from global commodity costs was on the wane.

Premier Wen Jiabao signalled as much last week when he wrote in the Financial Times that measures to control inflation had been effective and that he was “emphatic” in his belief that China would be able to maintain its course of rapid development.

In an attempt to unwind its stimulus, China has over the past nine months raised interest rates four times and banks’ required reserves nine times. Many small- and medium-sized enterprises, which struggle to get bank credit even at the best of times, have slowed production and warned of bankruptcy.

The sting from that sustained tightening has been felt most harshly by small- and medium-sized enterprises, which struggle to get bank credit even at the best of times. Strapped for cash, many have slowed their production and even warned of bankruptcy in recent months.

Global markets barely moved following the release of the Chinese data, with the focus still squarely on Greece’s fiscal woes and the looming battle over the debt ceiling in the US.

A slowdown is also apparent in India, where the HSBC/Markit PMI fell to a nine-month low of 55.3 in June after 10 interest rate hikes in the past 15 months.

“These numbers confirm that tight capacity and monetary tightening is constraining growth. However, inflation pressures are still firmly in place, calling for further policy rate hikes to anchor inflation expectations,” said Leif Eskesen, an economist at HSBC.

Separately, South Korean manufacturing growth continued to moderate after three interest rate rises this year. The HSBC Markit PMI dipped to 51.1 in June, a six-month low. Export growth also slowed to 14.5% in June from a year ago, the lowest level since October 2009. June consumer prices rose 4.4% from a year earlier, compared with the central bank’s target of 4%.

“We saw a surprise rate hike in early June and it would be unusual for South Korea to move [rates] twice in a row,” said Frederic Neumann, co-head of Asian economic research at HSBC.

Mr Neumann added the central bank could raise interest rates in the third or fourth quarter but he expected the government to adopt a “wait-and-see” attitude.

http://www.moneycontrol.com/news/world-news/china-manufacturing-at-lowest2-years_563621.html

 

 

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