China’s factory sector grew at its slowest pace in 28 months last month as new orders expanded less quickly, with weaker global demand and tight monetary policy at home pinching production.
Although the moderation in activity did not point to a sharp drop-off in Chinese economic growth for now, the data was slightly worse than forecast and led some analysts to predict China may be less aggressive in tightening monetary policy conditions later this year.
Some market watchers said Beijing could even take selective steps to tackle pressing bottlenecks, such as freeing up more credit to cash-strapped firms.
“This will further depress markets which have been increasingly worried about a hard landing in China,” said Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong, while arguing that China was more likely facing a soft landing.
“Some policymakers might be more concerned about over-tightening and might consider slightly adjusting their policy stance,” he said.
For example, he added, additional increases in banks’ reserve ratios that had been expected could now be put on hold.
The official purchasing managers’ index (PMI), designed to -provide a snapshot of conditions in China’s vast manufacturing sector, fell to 50.9 last month, below the expected reading of 51.3 and down from 52 in May, the China Federation of Logistics and Purchasing said yesterday. The 50-point level demarcates expansion from contraction.
A separate PMI survey by HSBC showed growth in overall factory production came close to stalling last month, confirming preliminary findings released last week. Its PMI reading stood at 50.1, with output falling for the first time since July last year amid lackluster demand and power shortages.
With the US economy sputtering and Europe fighting a debt -crisis, global investors are especially sensitive to any wobble in activity in China, a bastion of fast growth.
London copper prices fell about 0.6 percent in Asian trade yesterday after the China data was announced, but Asian stock markets were higher, hoping that an unexpectedly strong pick-up in business activity in the US Midwest signaled its economy was powering through a recent soft patch.
In a sign that China is not insulated from the troubles of its major trade partners, the official sub-index for new export orders in the PMI fell to 50.5 last month from 51.1 in May, reflecting persistent weakness in global demand. Backlogs of orders shrank for a second straight month.
US retailers are planning conservatively for the upcoming holiday season, trying to avoid being stuck with a pile of unsold goods as they were last season, retail executives told a Reuters consumer summit last week.
The official PMI showed new orders and exports orders were still growing, though at a much slower pace than in May, while the HSBC PMI indicated new export orders fell for a second straight month.
Chen Xingdong (陳興動), an economist at BNP Paribas, said the current trend in PMI suggests that China’s overall economic growth could be dipping towards 8 percent, a level that is probably too low for the government to accept as it might not create enough new jobs.
As such, Chen said he expects Beijing to “modify” China’s tight monetary conditions by giving small and medium-sized enterprises more access to cash.
He noted the Beijing is already trying to loosen credit controls a touch by allowing the Chinese Ministry of Finance sell bonds on behalf of a handful of local governments to support the building of government-subsidized homes.
“If growth decelerates and you don’t stop it, it would be like a ball rolling off a slope and its speed would pick up,” he said.
However, Dongming Xie (謝棟銘), an economist at OCBC Bank in Singapore, said inflation remained a more immediate worry for Beijing.
“I think it is too early to talk about loosing policy based on the current growth number as inflation is still a concern in the near term,” Xie said.
“Economic growth is slowing, but only at a moderate pace.”
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