The China manufacturing sector expanded at the slowest rate in 17 months in July, showing the government's efforts to tighten lending is weighing on the country's economy. But the Asian juggernaut is still posting strong enough growth to keep the rest of the world out of a "double dip" recession.
The HSBC China Manufacturing Purchasing Managers' Index released Sunday showed activity fell to 49.4 in July from 50.4 in June. A reading above 50 signals expansion, indicating manufacturing activity actually contracted for the first time since China's economic recovery began.
The HSBC PMI's reading was the first below 50 since March 2009. Measures of output, orders and export orders all showed contractions. Another measure, the official government PMI released yesterday (Monday), fell to 51.2 in July from 52.1 in June, the third straight month it has declined.
Similarly, HSBC Holdings plc (NYSE ADR: HBC) economist Qu Hongbin said China is having a "slowdown not a meltdown" and "there is no need to panic."
Analysts said the government may back off plans to tighten interest rates and instead move to stimulate growth by year-end as continued unemployment in advanced economies slows projections for exports.
"Government measures are taking overheating risks out of the economy, but any further weakening would be worrisome as China's export outlook may also deteriorate," Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB told Bloomberg. "The scope for yuan appreciation is declining further and there will be no interest rate hikes in the second half."
As developed economies in the west continue to struggle to emerge from the worst economic meltdown since the Great Depression, investors and officials are closely eyeing China's economy for any indications of a slowdown because it has been the one consistent engine of growth in recent years.
Growth in China's gross domestic product (GDP) clocked in at a 10.3% annual rate in the second quarter, dipping from 11.9% in the first three months of the year.
While the nation's growth may continue to shrink from its torrid first quarter pace, economists still expect its full-year growth rate to be as high as 9.5%, up slightly from 9.1% in 2009, State Council researcher Zhang Liqun told Bloomberg.
The government is cooling the economy by discouraging multiple-home purchases and
imposing restrictions on lending after banks stoked borrowing last year with a record $1.4
trillion in loans. Additionally, it's pushing for gains in energy efficiency and restricting
investments in pollution-generating industries as a five-year plan comes to an end.
After responding to the global economic crisis by reducing lending rates, the government
has moved to exit its easing strategy by raising banks' reserve requirements three times
this year. The benchmark one-year lending rate now stands at 5.31%, compared with 7.47% before cuts were implemented in 2008 at the height of the crisis, according to Bloomberg.
The government also has recently removed the yuan's three-year-old peg to the dollar,
which will make Chinese-made goods more expensive for consumers in Europe and the
U.S., where lawmakers had complained of unfair trade practices.
After a meeting over the weekend to plan second-half economic policy, China's central bank said in a statement it would continue to implement the current "moderately loose" monetary policy.
The People's Bank of China (PBOC) also vowed to keep a close watch for changes in domestic economic conditions as well as further developments in the European debt crisis and monetary policies of major economies, saying China's economic policy will need to be "flexible" and "forward-looking."
The decline in the widely watched purchasing managers' index makes it unlikely Beijing will impose any new aggressive tightening measures later this year as inflation pressures are expected to ease further.
Last week, the PBOC said that the country's current economic slowdown is beneficial for long-term sustainable growth, while adding that there is little risk of a "double-dip" recession.
That confirmed the bank's approach, signaling that the PBOC is unlikely to increase interest rates in the second half of the year, Lu Ting, a Hong Kong- based economist at Bank of America-Merrill Lynch China told The Wall Street Journal.
"The Chinese economy is slowing down mainly due to the ongoing property-tightening measures," Lu said yesterday (Monday). "Beijing will surely ramp up spending on public housing and other public works to stabilize growth."
But Lu also cautioned against letting monetary policy become too lax, potentially lighting the fuse on inflation.
"The slowdown is clearly not as dire as some expected. We don't think the current situation warrants an all-out fight to rescue growth," said Lu.
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