Chinese Manufacturing Output Contracts for the First Time in 33 Months

The 'shocking' data shows that the world's second-largest economy is 'sagging under the weight of this year's credit tightening,' one analyst said.

Chinese manufacturing activity in November contracted for the first time in 33 months, official data showed Thursday, vindicating Beijing's move to free up credit as global woes hit its exports.

The purchasing managers index (PMI) fell to 49 last month, down 1.4 points from October, marking the first contraction since February 2009, the China Federation of Logistics and Purchasing said.

A reading above 50 indicates the sector is expanding, while a reading below 50 suggests a contraction.

HSBC said its manufacturing activity index also fell to a 32-month low of 47.7 in November from 51 in October -- slightly worse than preliminary data released last week and signaling a "solid deterioration" in the sector.

'Shocking' Data

The data comes a day after China reduced the amount of money that banks must keep in reserve -- the first cut in three years -- as it looks to ease monetary policy in the face of a slowing economy.

IHS Global Insight analyst Alistair Thornton said the "shocking" data shows that the world's second-largest economy is "sagging under the weight of this year's credit tightening."

Most of the measures in the official survey deteriorated in November, with new orders and new export orders contracting, suggesting weakening demand in China as well as in Europe and the United States for Chinese-made products.

The weak figures signal that China's economy will "continue to slow," government analyst Zhang Liqun said in a statement.

But he ruled out a "huge downfall" in the Asian powerhouse due to the strength of domestic investment and consumption.

HSBC chief economist Qu Hongbin said the data, combined with a faster than expected easing in inflation, implies "growth is set to overtake inflation as Beijing's top policy concern."

But Credit Suisse analysts played down fears of a sharp slowdown in economic growth, saying the PMI data is weak but is "not collapsing to the below-40 level as was seen in 2008."

'The Loosening Campaign Has Begun'

On Wednesday, authorities cut bank-reserve levels for the first time since 2008 to help boost lending and spur growth to counter alarming signs of a domestic slowdown and the crisis in key export markets.

The announcement overshadowed the weak PMI data, with Chinese shares closing up 2.29% at 2,386.86 on expectations for further credit easing.

Analysts had forecast such a move after the central bank recently said that it will "fine-tune" monetary policy amid growing concerns that the weak global economy is increasing the risk of a sharp slowdown in China.

"The message is clear: The economy is slowing much faster than expected and the government has stepped into the ring. The loosening campaign has begun," said Thornton.

"We expect this to feed through into slower industrial-production growth numbers for November, and slower gross domestic product numbers for the fourth quarter."

The move to boost lending, which analysts estimate unlocked about $55 billion in liquidity, is the strongest signal yet that the government wants to ease tight credit restrictions put in place to curb surging inflation and property prices -- now showing signs of easing.

China's property market, a mainstay of the Asian country, has faced slumping sales and prices nationwide amid tough government restrictions on property purchases and bank lending.

The average price of residential properties in 100 Chinese cities fell 0.28% in November from October, marking the third consecutive month-on-month fall, according to real estate research firm China Index Academy.

China's consumer inflation eased in October to 5.5% -- the slowest pace since May -- while exports and imports sank in October as slowing growth in China and overseas woes sapped demand for Chinese goods.

Economic growth also slowed to an annual 9.1% in the third quarter from 9.5% in the previous quarter.

China, anxious about rising living costs, has pulled on a variety of levers to curb price rises in the past two years, including hiking interest rates five times since October 2010.

Copyright Agence France-Presse, 2011


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