China’s PMI shows worrying decline

Bloomberg

Fri, Nov 22, 2013 - Page 15

A Chinese manufacturing gauge declined for the first time in four months, adding headwinds to a recovery in the world’s second-largest economy as leaders start to implement the broadest policy reforms since the 1990s.

The preliminary 50.4 reading for this month’s Purchasing Managers’ Index (PMI) released yesterday by HSBC Holdings PLC and Markit Economics compared with a 50.8 median estimate from analysts surveyed by Bloomberg News. The final number for last month was 50.9, and levels above 50 indicate expansion.

Slower manufacturing gains would add challenges for Chinese Premier Li Keqiang (李克強) in carrying out a reform package that includes loosening controls on interest rates and giving farmers more land rights. Expansion headwinds may intensify after last month’s slowdown in credit growth that suggests Li is trying to contain financial risks.

“The recent growth rebound may have peaked,” Hong Kong-based Citigroup Inc senior economist Ding Shuang (丁爽) said.

“Tighter credit conditions and reform measures will continue to weigh on investment and growth through next year,” and reforms may be slowed if the risk of expansion slipping below 7 percent “becomes material,” Ding said.

Estimates for the HSBC-Markit preliminary, or Flash, PMI, from 18 analysts ranged from 50.4 to 51.7. The gauge is based on between 85 percent and 90 percent of responses to surveys sent to more than 420 manufacturers.

Output expanded at a faster pace, while new orders rose at a slower pace, HSBC’s statement said. Gauges of new export orders, employment and output prices showed contraction while input prices rose at a slower pace.

The Chinese Communist Party last week unveiled policy shifts after a four-day summit known as the third plenum.

The dozens of measures include gradually relaxing the residence-registration system in mid-sized cities, accelerating convertibility of the yuan and reducing price controls on water, oil, gas and power.

Given today’s figures, “resentment from vested interest groups resisting reforms will escalate,” Hong Kong-based Reorient Financial Markets Ltd chief China economist Steve Wang (王思為) said.

Mizuho Securities Asia Ltd chief Asia economist Shen Jianguang (沈建光) said a growth slowdown this quarter will not necessarily slow down reforms.

Instead, it will help accelerate changes that boost domestic demand, including rules on rural property, residential registration and the one-child policy, while “leaving other reforms that are negative to growth in a later stage,” Shen said.

GDP growth rebounded to 7.8 percent in the third quarter from a year earlier, after a 7.5 percent pace in the previous three months. The median estimate in a Bloomberg survey of 34 economists last month was for fourth-quarter expansion of 7.6 percent.

Last month’s data, released earlier this month, showed industrial production unexpectedly accelerated, exports rose more than estimated and inflation stayed below the government’s target.

At the same time, China’s broadest measure of new credit was lower than estimated, suggesting authorities are trying to keep shadow-banking risks in check.