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China Manufacturing May Expand at Slowest Pace in 11 Months

Source: Bloomberg

China’s manufacturing may expand at the slowest pace in 11 months in June, as output growth stalls and export orders drop, a preliminary purchasing managers’ index showed.

The 50.1-level reported by HSBC Holdings Plc and Markit Economics Thursday compared with a final reading of 51.6 in May. A number above 50 indicates expansion.

China has paused for 11 weeks in raising interest rates, the longest gap since increases began in October, as officials gauge the economy’s strength amid a slowdown in the US and a debt crisis in Europe.

“Demand is cooling thanks to the effect of tightening measures and the slackness in external markets,” said Qu Hongbin, a Hong Kong-based economist at HSBC. “But hard-landing worries are unwarranted not least because the current PMI is at a level consistent with around 13 per cent industrial production growth. The good news is that inflationary pressures started to ease meaningfully in June amid slowing demand.”

The National Development and Reform Commission said Wednesday that inflation may accelerate this month and “remain elevated for some months.”

China’s benchmark Shanghai Composite Index has tumbled about 13 per cent from this year’s April high on concern that higher interest rates will damp growth and hurt company profits. The gauge was 0.4 per cent higher at 1:30 pm local time.

HSBC’s preliminary manufacturing index, known as the Flash PMI, is based on 85 per cent to 90 per cent of the total responses to its monthly purchasing managers survey sent to executives in more than 400 companies. The final reading will be published on July 1.

The index may drop below 50, which would indicate a contraction, at some point in the next three months as a result of the government’s “aggressive” tightening measures, Paul Cavey, a Beijing-based economist with Macquarie Securities Ltd, said.

“The tightening policies have been successful and the PMI reading confirms a slowdown in growth because manufacturing still accounts for about 50 per cent of the economy,” Cavey said. “A contraction would reduce the likelihood of further tightening because growth will become more of a concern than inflation.”

In a sign manufacturing expansion is easing, passenger-car sales fell for the first time in more than two years in May as the government phased out incentives. Automakers including Honda Motor Co also cut production due to a shortage of components following Japan’s earthquake.

China’s efforts to cool real-estate prices is damping demand for housing, prompting Standard & Poor’s to cut the outlook on Chinese developers to negative from stable last week.

Still, demand for steel and cement may be sustained by Premier Wen Jiabao’s campaign to start building 10 million low-cost homes this year. Local government financing vehicles will be allowed to sell bonds to fund the construction of such projects, according to a notice on the website of the NDRC’s Anhui province branch on June 16.