China's Manufacturing Contracts for First Time in 16 Months

Fall due to credit tightening, property cooling measures and Beijing's measures to cut capacity in energy-intensive sectors

Manufacturing in China contracted in July, an independent survey showed on August 2, lifting Chinese shares on hopes that policymakers will refrain from any new tightening moves.

The HSBC China Manufacturing PMI, or purchasing managers' index, fell to 49.4 last month from 50.4 in June -- its first drop below the neutral 50 threshold since March 2009, the bank said.

"This suggests that manufacturing production growth continued to decelerate last month, reflecting the combined effect of credit tightening, property cooling measures and Beijing's measures to cut capacity in energy-intensive sectors," said HSBC chief China economist Qu Hongbin.

Qu however said the world's third-largest economy was still expected to maintain growth of around 9% despite the slowdown, thanks to huge infrastructure spending and resilient private consumption.

A separate survey published by a government agency on July 31 showed manufacturing activity slowed to 51.2 last month from 52.1 in June.

That was the lowest reading since February 2009, according to data released by the China Federation of Logistics and Purchasing (CFLP).

The heavy rains and massive floods that struck China in July contributed heavily to the weakening in manufacturing activity, economists with Nomura International said.

"Considering the heavy flooding around the country, we believe the July PMI print should be viewed as better than its headline values," they said in a research note. "We judge that unless the flooding continues into August, the next official PMI print is more likely to show a rise than it is a fall."

The HSBC survey showed the rate of decline in new work accelerated to the quickest pace seen since March last year, with many panelists citing lackluster client demand as denting new orders.

Meanwhile, inflationary pressures eased substantially, with the measures for output charges and input prices falling almost 17 and 30 points respectively since the start of the year, the bank said.

The softening PMI data in July raised hopes that authorities will not launch new tightening measures to avoid a sharp economic slowdown, sending Chinese shares to a more than two-month high on August6 2, up 1.33% at the close.

Copyright Agence France-Presse, 2010

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