China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, showing the government has yet to arrest an economic slowdown.
The Purchasing Managers’ Index (PMI) fell to 50.2 last month from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg survey of 24 economists. A reading above 50 indicates expansion.
Yesterday’s data increase the odds Chinese Premier Wen Jiabao (溫家寶) will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan (周小川) said on Friday.
“Although the PMI is slightly better than consensus, the underlying trend still indicates a deterioration in economic activity,” said Shen Jianguang, (沈建光) Hong Kong-based chief Asia economist for Mizuho Securities Asia Ltd. “Further monetary easing is warranted, with two interest-rate cuts and reserve ratio cuts in the second half increasingly likely.”
The People’s Bank of China lowered interest rates last month for the first time in more than three years and reduced the amount of cash banks must set aside as reserves three times starting in November last year.
Shen estimates economic growth slid to 7.2 percent in the second quarter from a year earlier and last month reduced his full-year estimate to 8.1 percent from 8.3 percent. GDP grew 8.1 percent in the first quarter, the least in almost three years.
The federation’s index is based on responses from managers at 820 companies in 31 industries. The gauge for large companies fell to 50.6 from 51.1 in May, while that for small companies contracted for the third month, the data show.
A separate purchasing managers’ index released by HSBC Holdings PLC and Markit Economics indicated that manufacturing may have contracted for an eighth month last month, according to a preliminary reading on June 21. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due tomorrow.
The gauge of new export orders in the federation’s index contracted for the first time since January, yesterday’s data showed. The scale of the drop was the biggest since December, the federation said.
“Tumbling export orders point to headwinds to exports in the third quarter, suggesting domestic demand needs to pick up to stabilize growth,” said Chang Jian (常建), a Hong Kong-based economist at Barclays Capital.
The PMI’s output sub-index fell to 52.0 last month from 52.9 the previous month while a gauge of new orders contracted for a second month. A measure of input prices dropped to its lowest reading since December 2008.
“On the negative side, the decline in raw material prices suggests poor final demand,” said Lu Ting (陸挺), head of greater China economics at Bank of America Corp.
“However, China is the world’s major importer of all kinds of raw materials so falling prices will help cut costs for Chinese manufacturers,” he added.
Industrial companies’ profits fell for a second month in May, a statistics bureau report showed on Friday, adding to signs the economy is weakening.