China's manufacturing contracts in July: HSBC survey

Manufacturing in China contracted for the first time in 16 months in July, an independent survey showed Monday, 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.

A reading above 50 means the sector is expanding, while below 50 indicates an overall decline.

"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.

 A Chinese worker looks on from her work station at a garment factory in Pinghu some 100 kms from Shanghai earlier this year

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

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

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

"Taking into account the downpours and floods plaguing many areas across the country, we believe the actual PMI reading should be better than what the figures indicated," they said in a research note.

"We think the official PMI index is more likely to go up than fall in August if the torrential rains and floods do not continue into this month."

HSBC's results are based on interviews with purchasing managers at more than 400 companies, while the survey by the China Federation of Logistics and Purchasing covers more than 700 firms.

The HSBC survey showed the rate of decline in new work accelerated to the quickest pace seen since March last year, with many panellists citing lacklustre 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 up 1.1 percent in afternoon trade Monday.

The Shanghai Composite Index, which covers both A and B shares, was up 28.98 points at 2,666.48.

China's economic growth slowed in the second quarter, as massive stimulus spending was scaled back and moves to rein in soaring property prices started to bite.

But gross domestic product nevertheless maintained its double-digit growth for the third quarter in a row, expanding 10.3 percent in the three months to June.

source AFP

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