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China May factory growth slows on govt curbs

Beijing, June 1, 2011

Chinese factories expanded in May at their lowest pace in at least nine months, two surveys showed on Wednesday, reinforcing evidence that the economy is slowing under the weight of government credit curbs and power shortages.

Despite Beijing's sustained tightening campaign over the past half year to control price rises, which has included hikes in banks' required reserves and interest rates, most economists believe the economy is retaining much of its momentum and in no danger of a hard landing.

With inflation running at its fastest in nearly three years, analysts expect the government to press ahead with policy    tightening in the coming months.

"The easing in PMIs is still manageable despite recent domestic and global factors. However, the government will have to address the problem of power shortages soon, which will likely further weigh on industrial production," said Connie Tse, economist at Forecast in Singapore. "At this juncture, I do not expect growth concerns to overtake that of inflation."

The official PMI, which is designed to provide a snapshot of conditions in the manufacturing sector, fell to 52 from 52.9 in April, the China Federation of Logistics and Purchasing said. The federation compiles the index on behalf of the National Bureau of Statistics.

The purchasing managers' index was slightly weaker than market expectations of 52.2 in a Reuters poll, but showed activity expanded for the 27th straight month. The threshold of 50 demarcates expansion from contraction.

"The continued fall in PMI in May, after a drop in April, shows the rising possibility of a slowdown in economic growth," Zhang Liqun, a government researcher, said in a statement accompanying the data release.

"The input price sub-index saw significant decline, indicating a possible change in inflationary expectations. Destocking activities may increase. All these will drive down the pace of economic growth," he said.

Yu Song and Helen Qiao, economists at Goldman Sachs, said in a note that the official PMI may have actually implied stronger activity because historically there has been a consistent tendency of weaker readings in May.

Meanwhile, HSBC's China Purchasing Managers' Index fell to a 10-month low in May at 51.6 from 51.8, largely in line with the official reading but slightly better than HSBC's preliminary "flash" estimate of 51.1 on May 23.

"This is still just a moderation rather than a meltdown in   growth, so there is no need to worry about over-tightening (of   monetary policy)," said Qu Hongbin, an economist at HSBC.

"Beijing is likely to keep tightening mainly through reserve  ratio and rate hikes in the coming months," Qu added.

Financial markets were largely unfazed by the Chinese PMIs on Wednesday after weakening in May as a flurry of data pointed to a slowdown in manufacturing growth globally.

Easing factory prices

While most economists expect a further slowdown in Chinese factory growth in the coming months, few believe the world's second-largest economy is heading towards an abrupt slowdown given still-solid domestic demand and exports.

China's economy is widely expected to grow by at least 9 per cent in the second quarter from a year earlier, slowing from the 9.7 per cent annual pace in the first quarter.

The new orders sub-index of the official PMI weakened to 52.1 in May from 53.8 in April. Much of the drop was driven by slower growth in export orders, whose sub-index dipped to 51.1 from 51.3 in April.

Both surveys showed a further easing in factory price increases, though price pressures remained strong.

The input prices sub-index of the official PMI, a measure of how much factories pay for raw materials and intermediary goods, fell to 60.3 in May, a 10-month low, from 66.2 in April.

The input prices sub-index of HSBC PMI fell to a nine-month low of 60.1 from 62.4 in April.

But analysts say the trend may take some time to trickle down to consumer inflation, which is widely expected to quicken in May from 5.3 per cent in April. – Reuters




Tags: China | power | Beijing | Factory growth | Government policy |

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