Second Month of Contraction for China Manufacturing

Cost of raw materials rose at a faster rate in August.

Export-driven China warned of weakening demand for its overseas shipments and pressure from rising costs amid "an increasingly complicated" global economic environment as HSBC data showed on August 23 that manufacturing activity in China contracted for the second straight month in August.

HSBC's preliminary purchasing managers' index rose to 49.8 in August from 49.3 in July -- which was the lowest level in 28 months and the first contraction in a year.

The August reading helped boost sentiment on regional markets which have been battered by the recent turmoil in Europe and the United States. Shanghai shares closed up 1.52% at 2,554.02, Hong Kong rose 1.99% to 19,875.53 and Tokyo jumped 1.22% to 8,733.01. Seoul shot up 3.86% to end at 1,776.68 and Sydney added 2.23% to 4,173.4.

The figures showed the cost of raw materials rose at a faster rate this month, complicating Beijing's efforts to rein in inflation in the world's second-largest economy.

New export orders continued to contract in August, HSBC said, amid deepening economic woes in the United States and Europe -- key buyers of Chinese-made products. But there were signs of slight improvement, it added. HSBC chief economist Qu Hongbin said the improvement in manufacturing activity this month showed that "the hard landing risk is still remote."

"This provides leeway for the PBOC (central bank) to keep the current tightening measures in place," Qu said.

But the acceleration in raw material prices could alarm policymakers who have been battling to tame inflation with numerous interest rate hikes and tighter lending restrictions. Inflation -- which leaders fear could trigger social unrest -- hit a more than three-year high of 6.5% in July compared with a year earlier, well above the government's annual target of four percent.

Capital Economics said the latest data suggested "the economy remains weak but... is at least stabilizing."

"If growth remains sluggish, as we expect, policymakers are likely to loosen controls on lending later in the year," the London-based research firm said.

Despite signs of a pick up in manufacturing activity, Vice Commerce Minister Jiang Yaoping warned China's export sector -- which employs millions of workers and is a key driver of economic growth -- was coming under increasing pressure. "China's foreign trade faces sluggish external demand and rising costs, and increasing competition," Jiang said, warning that the debt crisis in developed markets brings "increasing challenges" for China.

"We will closely follow changes in external markets and maintain the continuity and stability of foreign trade policies while increasing their flexibility and effectiveness."

Copyright Agence France-Presse, 2011

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