China’s manufacturing unexpectedly shrank for the first time in nine months as new orders contracted and output rose at a slower pace, signaling that the slowdown in the world’s second-biggest economy is deepening.
The Purchasing Managers Index fell to 49.2 last month from 50.1 in July, the Chinese National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. Australia & New Zealand Banking Group Ltd. cut its estimate for China’s full-year growth after the report.
Yesterday’s data increase pressure on Chinese Premier Wen Jiabao (溫家寶) to reverse the slowdown ahead of the transfer of power to a new Chinese Communist Party leadership that begins later this year. Record unemployment in the euro area and a jobless rate stuck at more than 8 percent in the US may crimp an export rebound while a slumping corporate earnings, bad debts at banks and property curbs are restraining investment in China.
“The government won’t want to hand over an economy in a hard landing to the next administration, so authorities are likely to become bolder with policy easing, said Liu Li-gang (劉利剛), chief China economist at ANZ in Hong Kong. “They could continue to use tax relief and faster approval of infrastructure investment to instill confidence, but the most effective policy tool in the short term is to aggressively ease the reserve-requirement ratio.”
Liu lowered his growth estimate for this year to 7.8 percent from 8.2 percent and said the risks to the forecast “are biased towards the downside.” He did not give a projection for the third quarter.
The People’s Bank of China cut interest rates in June and July and lowered the reserve-requirement ratio for banks three times starting in November as part of the government’s efforts to support lending and boost growth. The ratio, which is now 20 percent for the biggest banks, has not been reduced since May.
Last month’s PMI reading was lower than the estimates of 24 of the 25 economists in a Bloomberg News survey that had a median forecast of 50.0, the dividing line between expansion and contraction.
A gauge of export orders was unchanged from the previous month at 46.6, marking the third straight contraction. The decline in the new orders index deepened to 48.7 and a measure of output fell to 50.9. All three readings were the lowest since November.
“The index reflects continuing difficulties for the manufacturing sector and without strong supportive policies amid weak global demand, the PMI may drop further,” said Hu Yifan (胡一帆), a Hong Kong-based economist with Haitong International Securities Group (海通國際證券) who previously worked for the World Bank.
A reduction in banks’ reserve requirements “would send a positive signal to the markets to boost confidence particularly now that the PMI has broken the critical mark of 50,” he said.
A separate purchasing managers index released by HSBC Holdings Plc and Markit Economics indicated that manufacturing may have contracted for a 10th month last month, according to a preliminary reading on Aug. 23. The final number for the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due tomorrow.
The employment gauge in yesterday’s survey was below 50 for a third month and at the lowest level since January, while HSBC’s preliminary reading showed the sixth straight contraction.