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China May factory growth hits 10-month low

Beijing, May 23, 2011

China factories expanded in May at their slowest pace in 10 months while price pressures eased, a purchasing managers' index showed on Monday, adding to evidence that the economy is moderating as a tighter policy starts to bite.

Still, results to the HSBC flash manufacturing purchasing managers' index (PMI) showed that China's vast manufacturing sector is gently easing rather than heading for a deep downturn as demand at home and abroad remained firm.

Data showed the flash PMI eased to 51.1 in May, the lowest since July 2010, but still on track for expansion as a reading above 50 points to growth. The index stood at 51.8 in April.

The pull-back in China factory activity will likely be mirrored in euro zone flash PMIs due later on Monday.

The China flash PMI, designed to preview conditions in a broad range of industries before official data is released, has a short four-month history. It has been a good indicator of the general trend in factory activity in that time, however.

"Manufacturers continued to reduce inventories amidst slowing new business flows, leading to slower production growth at a 10-month low," said Qu Hongbin, chief China economist at HSBC.

Qu stressed there is no need to worry about a "hard landing" in China because the PMI still suggested that factory output is growing about 13 per cent, and gross domestic product at 9 per cent.

"Policy focus is still tilted towards taming inflation. We expect Beijing's tightening policy will continue in coming months," he said.

Indeed, a sub-index for input prices in the survey fell to 60.1 in May, a nine-month low, but still pointing to persistent price rises.

That will not provide much comfort to Beijing, which wants to tame inflation from near 32-month highs of 5.3 per cent struck in March.

Talk that China's economy may face a sharp slowdown, or a "hard landing", picked up this month after official data showed industrial activity and bank loans missing market forecasts.

Yet, some analysts say concerns about a slowdown in China are overdone, especially since the official PMI published by Beijing has shown factories expanding every month in the last 26 months.

Many analysts expect China's economic growth to slow modestly from a turbo-charged pace of 9.7 per cent in the second quarter. Such a moderation is exactly the outcome desired by Beijing in its bid to tame inflation.

A senior government researcher argued that line in remarks published on Monday, saying that slowing growth will aid China's quest to calm inflation, but he suggested the central bank's task of managing growth and price pressures may be more tricky hereon.

The central bank, keen to put a lid on inflation, has unveiled a series of tightening measures in recent months, including repeated increases in banks' required reserves and interest rates.

The flash PMI, compiled by British research firm Markit, is based on up to 90 per cent of total responses to a monthly survey and is designed to be a snapshot of the final data, usually released on the first working day of the month.

The final HSBC PMI data is due on June 1, alongside the official PMI.

This is the fourth month that HSBC has published a flash PMI for China. In April, the flash reading was 51.8, right in line with the final reading. – Reuters




Tags: HSBC | China | Beijing | factory | PMI | May |

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