Chinese manufacturing shrank last month for the first time since the global downturn in March last year as government steps to slow bank lending and fight property speculation hit home.
An index based on a nationwide survey of business executives conducted for HSBC dropped to 49.4 from 50.4 in June. A reading below 50 in the gauge, which is designed to be a leading indicator of conditions in industry, denotes contraction.
However, economists at HSBC and other banks played down the risk of a serious slowdown, while government researchers saw no need for an early shift in policy.
Financial markets took the drop in the Purchasing Managers’ Index (PMI) in their stride, relieved that a companion PMI, produced for China’s National Bureau of Statistics and released on Sunday, held firmly above the 50 mark.
The Japanese yen and Australian dollar barely budged, while Asian stocks outside Japan extended their gains as investors focused on strong company earnings.
HSBC said the fall in the PMI, which was led by the second successive drop in output and new orders, had to be interpreted with caution. The bank said it remained consistent with annual growth in Chinese industrial production of 11 to 13 percent.
“We still expect the economy to grow by around 9 percent in the second half of 2010 and 2011, driven by resilient private consumption and continued investment demands of ongoing infrastructure and new public housing construction projects,” HSBC economists Qu Hongbin (屈宏斌) and Sun Junwei (孫俊偉) said in a note.
China has been steering policy back to normal after an unprecedented surge in credit last year fanned fears by the start of this year that the economy could be overheating.
Anxious to cushion the fallout of the global crisis, Beijing encouraged state-run banks to complement a 4 trillion yuan (US$585 billion) stimulus package, geared mainly to public works, that it announced in November 2008. Loan growth is now being reeled in.
Xing Ziqiang (邢自強), an economist at China International Capital Corp in Beijing, said the pair of PMIs pointed to a desired moderation of growth, not to a feared double-dip.
The closely watched official PMI, which was released on Sunday, fell to a 17-month low of 51.2 last month from 52.1 in June, but stayed in positive territory.
“Actually, I would describe the results as fairly ideal. The slowdown is what the macro controls are aimed at producing and that will ease people’s concern about the sustainability of growth,” Xing said.
With the economy growing at a normal rhythm, there was no need for a big policy shift over the rest of the year, he added.
The People’s Bank of China sent out a similar message on Sunday So did Ba Shusong (巴曙松), a senior researcher with the Development Research Center, a think tank under the State Council, China’s Cabinet.
The economy had entered a small adjustment phase, but the cyclical upswing was intact, the official China Securities Journal paraphrased Ba as saying.
“As long as the growth trend is within our expectations and exports don’t show a big decline, there’s no need for the government to launch another big stimulus package,” he said.
However, it was too soon to remove an array of restrictions introduced in April to deter property speculation, according to Wang Yulin, a researcher at the Ministry of Housing and Urban-Rural Development.
China should stabilize market expectations by strengthening the curbs in some cities and increasing housing supply, Wang was quoted by the same paper as saying.
The decline in the HSBC PMI has echoes of a fall below 50 in August 2008 ahead of the bankruptcy of investment bank Lehman Brothers, which plunged the world financial system into chaos and ushered in the deepest global downturn in 80 years.
But conditions today are much brighter, Qu and Sun with HSBC said.
“The global economy is heading for a recovery [albeit a slow one], which should help avert a total collapse in exports. Moreover, the domestic engine hums on,” they said.
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