Money Matters, Simplified.
Chinese manufacturing sector contracts in July
by Sophie Anderson - August 2, 2010 - comments
China's vast manufacturing sector cooled further last month as the government kept its foot on the credit brakes and held firm in its efforts to deter real estate speculation.
The Chinese administration’s clamping down on pollution causing and energy-intensive factories led to a contraction in the manufacturing sector in the ‘Workshop of the World’ for the 1st time in over a year.
The contraction notwithstanding, the world's third-largest economy is likely to grow at an overall rate of 9 percent, given large investments in infrastructure and robust private consumption.
PMI falls below 50
The purchasing managers’ index (PMI) released by HSBC Holdings Plc, fell to 49.4 last month from 50.4 in June, raiing hopes that the government would refrain from initiating new stringent moves.
As a thumb rule, a PMI reading above 50 indicates expansion, while a reading below 50 indicates an overall decline. HSBC's results are based on interviews with purchasing managers at more than 400 companies.
"We think the official PMI index is more likely to go up than fall in August if the torrential rains and floods do not continue into this month," opined the economists.
"This suggests that manufacturing production growth continued to decelerate last month, reflecting the combined effect of credit tightening, property cooling measures and Beijing's measures to cut capacity in energy-intensive sectors," said HSBC chief China economist Qu Hongbin.
China is having a "slowdown not a meltdown" and "there is no need to panic," assured Hongbin.
China was struck by heavy rains, which also led to the weakening of the manufacturing sector.
"Taking into account the downpours and floods plaguing many areas across the country, we believe the actual PMI reading should be better than what the figures indicated," economists at Nomura International said.
"We think the official PMI index is more likely to go up than fall in August if the torrential rains and floods do not continue into this month," opined the economists.
Government initiatives
China had, during the second quarter, scaled back its massive stimulus spending to control the skyrocketing property prices. This rollback of stimulus started to bite and led to a slowdown in the economy.
The government trimmed credit growth considerably from last year’s record $1.4 trillion and also discouraged multiple-home purchases.
"Government measures are taking overheating risks out of the economy, but any further weakening would be worrisome as China’s export outlook may also deteriorate," said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB.
The government also raised banks’ reserve requirements during the year.
"The scope for yuan appreciation is declining further and there will be no interest rate hikes in the second half," added Kowalczyk.