China's Manufacturing Growth Weakens as New Orders Drop - Businessweek

China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, showing the government has yet to arrest an economic slowdown.

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg News survey of 24 economists. A reading above 50 indicates expansion.

Today’s data increase the odds Premier Wen Jiabao will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan said on June 29.

“Although the PMI is slightly better than consensus, the underlying trend still indicates a deterioration in economic activity,” said Shen Jianguang, Hong Kong-based chief Asia economist for Mizuho Securities Asia Ltd. “Further monetary easing is warranted, with two interest-rate cuts and reserve ratio cuts in the second half increasingly likely.”

The People’s Bank of China lowered interest rates last month for the first time in more than three years and reduced the amount of cash banks must set aside as reserves three times starting in November.

Slower Growth

Shen estimates economic growth slid to 7.2 percent in the second quarter from a year earlier and last month reduced his full-year estimate to 8.1 percent from 8.3 percent. Gross domestic product grew 8.1 percent in the first quarter, the least in almost three years.

The federation’s index is based on responses from managers at 820 companies in 31 industries. The gauge for large companies fell to 50.6 from 51.1 in May, while that for small companies contracted for the third month, the data show.

A separate purchasing managers’ index released by HSBC Holdings Plc and Markit Economics indicated that manufacturing may have contracted for an eighth month in June, according to a preliminary reading on June 21. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due tomorrow.

The benchmark Shanghai Composite Index (SHCOMP) has fallen 9.6 percent from this year’s peak on March 2 on concern the government isn’t loosening monetary policy quickly enough to stem a slowdown. The gauge rose for the first time in eight days on June 29, on speculation European turmoil is easing after the region’s leaders agreed to soften repayment conditions for loans to Spanish banks.

Yuan Gains

Gains in China’s currency against the U.S. dollar have stalled as growth in Asia’s biggest economy has slowed and Europe’s debt crisis curbed demand for exports. The yuan weakened 0.88 percent in the second quarter, according to the China Foreign Exchange Trade System, its biggest quarterly decline since a dollar peg ended in 2005.

UBS AG cut its end-2012 estimate for the yuan to 6.25 to 6.35 per dollar from a previous forecast of 6.15, according to a June 29 note that cited continued uncertainty and weakness in the global economy.

The gauge of new export orders in the federation’s index contracted for the first time since January, today’s data showed. The scale of the drop was the biggest since December, the federation said.

“Tumbling export orders point to headwinds to exports in the third quarter, suggesting domestic demand needs to pick up to stabilize growth,” said Chang Jian, a Hong Kong-based economist at Barclays Capital.

Poor Demand

The PMI’s output sub-index fell to 52.0 in June from 52.9 the previous month while a gauge of new orders contracted for a second month. A measure of input prices dropped to its lowest reading since December 2008.

“On the negative side, the decline in raw material prices suggests poor final demand,” said Lu Ting, head of greater China economics at Bank of America Corp. “However, China is the world’s major importer of all kinds of raw materials so falling prices will help cut costs for Chinese manufacturers.”

Industrial companies’ profits fell for a second month in May, a statistics bureau report showed on June 29, adding to signs the economy is weakening.

Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, said June 11 it lowered prices for July delivery as demand from makers of appliances and cars slowed. China Resources Cement Holdings Ltd. (1313), the fourth-largest Hong Kong- listed cement maker by market value, said June 27 its first-half net income “significantly decreased” compared with last year as selling prices fell due to slower growth in China’s fixed- asset investment.

--Zheng Lifei. With assistance from Cynthia Li in Hong Kong. Editors: Nerys Avery, Jim McDonald

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net