CHINESE MANUFACTURING WINDING BACK IN THE FACE OF A MAJOR SLOWDOWN

MANUFACTURING IN CHINA GRINDS DOWN TO AN ALL TIME LOW

Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy.

The decline comes a day after the US Federal Reserve led a co-ordinated move to ease global liquidity concerns – particularly in Europe – and the Chinese central bank loosened monetary policy.

Chinese government data released on Thursday showed that the official purchasing managers’ index fell to 49 in November from 50.4 in October. The worse than expected fall marked the first decline since February 2009. A reading of less than 50 means the manufacturing sector has contracted.

In a surprise move that was clearly timed to offset the negative impact of the PMI number, China’s central bank on Wednesday kicked off a new round of monetary easing by announcing a cut in the reserve ratio for banks for the first time in three years.

“The markets have been handed a powerful one-two combo, in the form of a shocking PMI print and an aggressive RRR cut,” said Alistair Thornton, China analyst at IHS Global Insight. “The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring.”

Most analysts did not expect monetary easing to begin until at least the first quarter of next year , but Beijing is facing the prospect of a stall in its two biggest growth engines – exports and real estate. Policymakers are now more concerned about supporting growth than tackling inflation and are expected to announce more monetary loosening measures in the ensueing months.

That reverses two years of gradual monetary tightening in which the government has been trying to cool growth and rein in persistently high price increases in a campaign that appears to have been largely successful.

The FTSE Asia Pacific excluding Japan index jumped 4.2 per cent by early afternoon in Hong Kong, taking its cue from a 4.3 per cent surge in the S&P 500 overnight and a 5 per cent jump in Germany’s Dax.

In Tokyo, the Nikkei rose 2.1 per cent to 8,614.62, while in Seoul the Kospi jumped 4.1 per cent to 1,922.55. The best performer in the region was the Hang Seng, which surged 5.6 per cent to 18,991.10.

Stephen Green, economist at Standard Chartered, said the decline in Chinese manufacturing “looks like the nasty scissors of lagging wage hikes and poor orders” affecting the small and medium-sized business sector in the country.

Underscoring the impact of the eurozone crisis on China, David Liu, president of Luca Angelo Leather, a company that makes mid-priced handbags in China for export to Europe, said sales to the continent had declined by between 30 and 40 per cent over the past two months.

By reducing the amount of deposits banks must hold on reserve by 0.5 percentage points, the central bank in effect injected about Rmb400bn ($63bn) into the banking system so that lenders could extend more credit to the slowing economy.

A parallel PMI survey compiled by HSBC also fell in November, dropping to 47.7 from 51 the previous month. The reading was the lowest since March 2009, and slightly worse than a preliminary reading of 48 issued last week.

JPMorgan analysts said they expect consumer inflation to be about 4.5 per cent in November, down from 5.5 per cent in October and well below the peak of 6.5 per cent in July. The input prices sub-index of November’s official PMI, an indicator of inflationary pressure, supported that forecast, declining to 44.4 from 46.2 in October.

But pulling down inflation has come at the cost of a steeper than expected drop in growth. In a sign that the economy is likely to slow even more in the coming months, the new orders sub-index fell 2.7 points to 47.8, while the new export orders sub-index dropped 3 points to 45.6.

Exports to the EU and US, China’s two largest trading partners, have decelerated in recent months and the fall in export growth to crisis-hit Europe has been particularly pronounced.

Meanwhile, real estate sales volumes have dropped sharply across the country and more than halved from a year earlier in some large cities while prices have also started to decline.

Although construction growth in the country has held up until now, most property developers appear to be delaying new projects, raising the prospect of a halt in housing construction that could be devastating for the overall economy in China.

Real estate construction accounted for around one-quarter of all investment in China last year and about 13 per cent of GDP.

Sourced & published by Henry Sapiecha

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