Manufacturing growth slowing as cooling measures start to bite

PUBLISHED : Wednesday, 02 March, 2011, 12:00am
UPDATED : Wednesday, 02 March, 2011, 12:00am

China's manufacturing growth slowed to a six-month low last month as tighter credit hurt demand.

The purchasing managers' index (PMI) fell to 52.2 last month from 52.9 in January but remained in expansionary territory, or above the threshold of 50, according to a survey by China Federation of Logistics and Purchasing for the National Bureau of Statistics.

The survey, which polled over 800 enterprises on the mainland, showed inflation in input prices intensified, particularly in metal products, oil refining, coking and textile sectors. Economists expect Beijing to introduce more measures to tame consumer price inflation after the annual session of the National People's Congress in Beijing starts this week.

Premier Wen Jiabao said over the weekend that the government's priority would be to rein in consumer and property prices, which have been rising steadily.

A BBVA research report said the February PMI is further proof that the government's recent tightening measures 'are working towards achieving an economic soft landing'.

Cooling manufacturing activities were also reflected in the HSBC/Markit PMI, which grew at the slowest pace in seven months to 51.7 last month from 54.5 in January while inflation in input prices surged to a three-month peak.

If the Lunar New Year holiday is factored in, the HSBC/Markit PMI would drift lower to 53.1 in the first two months of this year from 54.8 in the final quarter of last year while the official PMI shrank to 52.6 from 54.6 previously.

HSBC chief economist Qu Hongbin said both indices showed the trends of manufacturing slowing and inflation accelerating.

Qu said the impact of Beijing's tightening measures would seep further into the economy in coming months, resulting in slower economic growth.

'Concerns about excessive over-tightening or a possible hard landing for China are unwarranted,' he said.

Many economists anticipate Beijing will again raise the reserve requirement ratio, or funds banks must set aside when lending, and interest rates to contain inflation.

In the past six months, the reserve requirement ratio has been raised five times and interest rates three times, apart from cooling measures in the real estate market. Morgan Stanley chief economist Wang Qing said the Politburo's statement on February 20 showed subtle changes in policy in highlighting the importance of 'continuity and stability' of macroeconomic policy and 'preventing large fluctuations in economic growth'.

'These subtle changes in policy wording signal the authorities' pro-growth bias despite the still strong inflationary pressures,' Wang said. 'This should help substantially reduce the risk of an economic hard landing as a result of potential policy over-tightening in the near term.'


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