Chinese manufacturing activity falls again

Written by The Financial Times | Updated: Dec 31 2011, 19:32pm hrs
By Simon Rabinovitch in Beijing

Chinese manufacturing activity declined for the second consecutive month in December but showed tentative signs of stabilising, according to a survey published on Friday.

The HSBC purchasing managers index (PMI) for China hit 48.7 this month, weighed down by falling orders and remaining below the 50 mark that denotes a contraction. Yet the decline was softer than November's 47.7 reading, signalling that Chinese manufacturing growth may be nearing a bottom, at least in the short term.

Qu Hongbin, chief China economist with HSBC, warned it was still too early to sound the all-clear and that more aggressive action on both fiscal and monetary fronts was needed to shore up growth. A hard landing should be avoided so long as easing measures

filter through in the coming months, Mr Qu said.

With inflation falling sharply and growth slowing in recent months, China has cautiously started to relax its tight monetary policy settings. It trimmed banks required reserves at the end of November - its first such move in three years - and analysts expect another cut in the coming weeks, if not days.

With Europe still struggling and the US recovery proceeding in fits and starts, the global economy has become increasingly reliant on China as an engine of growth.

In a stark reminder that liquidity is still constrained in China, money market rates spiked this week. The seven-day repurchase rate, a key gauge of short-term funding costs, hit 5.6 per cent on Friday, the highest in more than five months as banks scrambled for cash before the year's end. The stock market has provided another indication of the slowing economy.

The Shanghai Composite Index is down 22 per cent this year - making it technically a bear market - and is near its lowest level since early 2009.

But balanced against these negatives, there have also been some more hopeful signs. The central bank appears to have been successful in turning the tide on the renminbi through its interventions in the foreign exchange market.

The Chinese currency had come under sustained selling pressure since September but has climbed 1 per cent against the US dollar this month even as the dollar has strengthened against other currencies. The government of Zhejiang province, China's heartland of private entrepreneurs, also reported this week that small- and medium-sized companies were faring better thanks to increased financing support and that a much-feared wave of bankruptcies had not materialised.

The slowdown in the Chinese economy has to a significant extent been the result of a concerted effort by the government to rein in housing prices. Transaction volumes have fallen abruptly in recent months and prices have finally started to edge down, but officials have insisted that they will continue to clamp down on the property sector next year.

China's official PMI for December is due to be published on new year's day. Analysts expect that it will also point to a moderate contraction in manufacturing activity.

The Financial Times Limited 2011