China Manufacturing Growth Slows, Curbing Overheating Risk

By Bloomberg News
March 1 (Bloomberg) -- China’s manufacturing grew at a slower pace in February, reducing the risk of overheating in the fastest-growing major economy.
A Purchasing Managers’ Index released by the government today slid to a one-year low. Another PMI, from HSBC Holdings Plc and Markit Economics, showed the weakest expansion in three months. A weeklong Chinese holiday last month may have affected the numbers.
Investors are concerned that China’s economy may lose momentum, undermining the global recovery, as the government reins in stimulus to counter inflation and asset-bubble risks. Premier Wen Jiabao reaffirmed a "moderately loose" monetary stance on Feb. 27 ahead of an annual address to lawmakers on March 5 where he will outline policy for 2010.
"A moderation in Chinese manufacturing growth is actually good news because it helps contain overheating and inflation risks," said Qu Hongbin, chief China economist at HSBC in Hong Kong. Export gains, consumer spending and credit growth that remains "excessive" may ensure an economic expansion of more than 10 percent in the first quarter from a year earlier, he said.
The Shanghai Composite Index rose 1 percent as of 1:14 p.m. local time, paring this year’s decline to 5.9 percent.

Conflicting Evidence

The surveys gave conflicting evidence on export orders, with the government’s measure falling to a nine-month low as HSBC’s rose to the highest in almost five years. HSBC’s survey is more heavily weighted toward private businesses.
"We were looking for a lower PMI because of the Chinese New Year, which always hits new orders, particularly exports, as well as the beginning of the effects of government policy," said Stephen Green, an economist at Standard Chartered Plc in Shanghai. "Across a range of policies -- monetary, fiscal and investment -- we have seen the government shift position, to take some of the momentum out of the V-shaped recovery."
He said the outlook for the economy was "relatively benign" for 2010 with a sharp slowdown unlikely.
Overall, the government’s index fell to a seasonally adjusted 52, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. That was less than 55.8 in January and the median 55.2 estimate in a Bloomberg survey of 15 economists. HSBC’s PMI declined to
55.8 from 57.4.

‘Really Ugly’

Today’s reading in the official survey was the weakest since manufacturing stopped contracting in March last year.
Ten industries, including clothing and footwear, reported contractions in export orders versus 10 posting expansions, highlighting the risk that global demand may be weak this year. Jingwei Textile Machinery Co. is among Chinese companies forecasting a loss for 2009.
The number is "really ugly," said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. "The weakness cannot be explained with the Lunar New Year holiday effect and indicates a slowdown in growth momentum as well as easing price pressures, which is likely to limit monetary tightening."
In contrast, Brian Jackson, an emerging-markets strategist at Royal Bank of Canada, said the holiday complicated the data and it was "premature" to say China is losing steam. UBS AG and Bank of America-Merrill Lynch echoed that view.

‘Cautious’ on Exports

In today’s data, a reading over 50 indicates an expansion. The official survey’s output index slid to 54.3 from 60.5. A measure of orders tumbled to 53.7 from 59.9.
An index of export orders fell to 50.3 from 53.2 in January.
"The decline in new export orders warrants close attention and we need to be cautious on the outlook for export growth," Zhang Liqun, a researcher at the State Council Development and Research Center, said in the statement.
In contrast, HSBC said businesses that took part in its survey detected "improved economic conditions among a number of China’s key trading partners."
The world is counting on China to drive growth as Europe’s recovery falters and the U.S. grapples with high unemployment. In a Feb. 27 webcast, Wen said 2010 would be a complicated mix of sustaining the economic expansion, adjusting the nation’s growth model and managing inflation expectations.

China’s Rebound

China’s growth accelerated to 10.7 percent, the fastest pace since 2007, in the fourth quarter on stimulus spending, subsidies for consumer purchases and a record 9.59 trillion yuan ($1.4 trillion) of bank lending last year. Increased demand was a factor in Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, raising prices for March delivery.
Policy makers are cooling credit growth to restrain inflation and limit the risk of soured loans and asset bubbles as property prices surge in cities such as Shenzhen and Sanya. The central bank has twice raised lenders’
reserve requirements this year, while leaving interest rates unchanged.
While both surveys showed price increases slowing, HSBC’s Qu said that "inflationary pressure persists."
Exports climbed for a second straight month in January after plummeting because of the financial crisis. Subsidies within China for car and home-appliance purchases and tax rebates for exporters will be continued this year to support growth, the government said.

Fixed Currency

The central bank is also yet to loosen the yuan’s effective peg to the dollar, which has kept the currency at about 6.83 since July 2008, aiding exporters and increasing tensions with trading partners.
After last year overtaking the U.S. as the biggest auto market and Germany as the largest exporter, China is poised to overtake Japan this year as the second-largest economy. The nation will contribute more than a third of global growth in 2010, according to Nomura Holdings Inc.
Today’s government PMI figure was up from a record-low
38.8 in November 2008, when recessions in the U.S., Europe and Japan sent export orders plunging.
The official manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, is based on replies to questionnaires sent to purchasing executives at more than 730 companies in 20 industries. The HSBC survey covers more than 400 businesses.