Flagging growth at mainland factories

PUBLISHED : Monday, 02 July, 2012, 12:00am
UPDATED : Monday, 02 July, 2012, 12:00am

Growth in manufacturing activity on the mainland slowed to a six-month low in June as domestic and export demand fell, but analysts say it could pick up in the second half as stimulus measures kick in.

The purchasing managers' index (PMI) edged down to 50.2 in June, from 50.4 in May, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing. It was 50.3 in December.

A PMI reading of above 50 indicates growth in manufacturing activity, while a reading of below 50 indicates a contraction.

The mainland PMI is compiled from surveys of 820 companies in 31 industries and has various components. While the latest reading showed a slowdown in overall activity, respondents reported that both output and stocks of finished goods expanded in June. But new domestic and export orders as well as employment contracted.

Although the PMI was down, it was higher than a market consensus forecast of 49.9, and Liu Ligang, head of Greater China research for ANZ Bank, expected faster manufacturing growth this month. 'It normally takes two to three months for fiscal and monetary policies to be felt by the real economy,' said Liu.

Beijing cut the reserve requirement ratio for banks in May, then interest rates in June - the first rate cut in the last four years - seeking to cushion the economy from the effects of slowing exports and the euro-zone debt crisis.

But Liu said a slow but continuing recovery in the US economy, positive Greek election results and the latest euro-zone debt rescue plans pointed to a possible revival in export demand. He also expected further policies from Beijing to support growth.

Other economists expected more stimulus to sustain economic growth on the mainland, which has slowed since the end of last year as a result of fiscal tightening policies and measures to cool the property market.

The PMI slid to 49.0 in November because of the combined effect of a weak global economy and monetary tightening at home. Beijing has since cut the reserve requirement ratio three times - most recently in May.

Lu Ting, China economist for Bank of America Merrill Lynch, said the weak PMI data and falling employment would likely prompt policymakers to bring in measures to support growth. He expected a rebound in economic growth to 8 per cent in the third quarter, up from 7.5 per cent in the second, with Beijing expected to ramp up spending on housing and infrastructure, push through new projects, and further ease lending restrictions on banks.

Hu Yifan, China economist for securities firm Haitong, said manufacturing data had started to stabilise in the second quarter and she expected activity to gain momentum in the third with more policies likely to be announced in the next few months. But she noted that global and macro-economic uncertainties would continue to be a drag on the economy.

The US government is due to announce its June jobs data on Friday and analysts are expecting job creation to have slowed in the month, indicating that momentum behind the recovery is flagging.

The yuan weakened against the US dollar in the second quarter, partly because of lower demand for mainland exports.

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