China Manufacturing Output Slows Its Slide - New York Times

BEIJING â€" Manufacturing output in China made its best showing in nine months in July, helping lift an index of activity in the country’s overall factory sector to its highest level since February, a survey showed Tuesday.

The HSBC flash China manufacturing purchasing managers index rose to 49.5 in July from 48.2 in June, rising close to the level â€" 50 â€" that divides expansion from contraction. The increase was driven by a jump in the subindex on output, which rose to 51.2, the best showing since October 2011.

The flash index is the first significant Chinese data point in the third quarter and signals that improvement in the economy that began in the second quarter may be broadening as pro-growth government policies take effect.

Still, the HSBC index has been below 50 for nine consecutive months.

“This calls for more easing efforts to support growth and jobs,” Qu Hongbin, chief China economist with the index sponsor, HSBC, said in a news release accompanying the survey. “We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months, when these measures fully filter through.”

The index, compiled by the British data provider Markit, showed broad improvement across the manufacturing sector, with five subindexes slowing their rates of decline and five showing a change of direction.

The subindex for new orders recovered to a three-month high, while new export orders gave their best showing since May.

The flash index is based on 85 percent to 90 percent of total purchasing manager survey responses, which are to be published in full in about a week.

The employment subindex deteriorated from its level in June, however, sinking further below 50 to its lowest level since March 2009.

Although still just above the readings at the depths of the global financial crisis, when about 20 million Chinese jobs were lost in a few months in late 2008 as global trade almost ground to a halt, the fall in the employment index is a reminder of the risks in an area to which China’s government is most sensitive.

Analysts say an overall index level of 48 is consistent with manufacturing output strong enough to deliver the employment growth China’s government needs to absorb millions of new graduates and rural migrant workers each year.

But the fall in the employment subindex to a 40-month low is a potential alarm bell.

Jobs are a crucial variable for the Communist Party leadership of China, especially in preparations for its once-a-decade handing over of power â€" an event scheduled for this autumn that the government is determined to hold against a backdrop of social stability and economic prosperity.

The 2008 job losses led to a stimulus program of 4 trillion renminbi, or $635 billion, from Beijing.

The government has avoided a similar response to the current slowdown, in large part because it is still cleaning up the consequences of the last one.

It has been fine-tuning policies instead, speeding up spending on important projects, cutting the amount of cash banks must keep in reserve to free an estimated 1.2 trillion renminbi for lending and, in the space of four weeks in June and July, twice lowering benchmark lending rates.

Analysts polled by Reuters this month expected a cut in interest rates of a quarter of a percentage point and a cut of a full percentage point in banks’ required reserve ratios by the end of the year.

Relative tightness in the Chinese labor market has been linked to economic rebalancing and to companies’ efforts to hold on to workers to avoid having to pay a premium to rehire them when the economy starts to rebound.

Despite six consecutive quarters of slowing growth, to a rate of 7.6 percent in the second quarter from the level of a year earlier â€" just above Beijing’s official target of 7.5 percent â€" there are more job vacancies in China than there have been for about a decade.

Soft demand from a debt-ridden Europe â€" which until recently was China’s biggest export market, replaced in the first half of the year by the United States â€" has piled pressure on the Chinese economy.