Manufacturing sector shrinks

PUBLISHED : Friday, 02 December, 2011, 12:00am
UPDATED : Friday, 02 December, 2011, 12:00am


China's manufacturing sector shrank for the first time in 32 months on weakened overseas demand, adding weight to calls for further monetary easing.

In a National Bureau of Statistics survey, the Purchasing Managers' Index fell to 49 last month from 50.4 in October, falling below economists' consensus forecast of 49.8. A reading below 50 indicates contraction.

On Wednesday night the People's Bank of China pared the reserve requirement ratio, the amount of funds banks must set aside when lending. Economists said the earlier-than-expected reduction, the first in nearly three years, signalled the central government's deepening concern the European debt crisis will affect the mainland economy.

'The November PMI suggests that China's industrial activities are already heading for a major downturn,' Daiwa Capital Markets chief economist Sun Mingchun said yesterday. 'Although policymakers have officially changed from tightening to loosening, the slowdown is likely to accelerate in the coming months, as it takes time for the loosening to have a positive impact on the economy.'

He expects a 200 basis point reduction in the reserve requirement ratio next year.

The central bank announced on Wednesday a cut of 50 basis points to 20.5 per cent for bigger banks and to 18.5 per cent for smaller banks effective on Monday.

The Organisation for Economic Co-operation and Development emerged as the first major body to highlight the possibility of a euro break-up, doubting that euro-zone policymakers are able to deal effectively with the challenges they face and warned on Monday of contagion effects on the world economy.

The China Federation of Logistics and Purchasing, which compiled the PMI on behalf of the statistics bureau, said new export orders and new orders tumbled last month amid softening demand, tight credit conditions and stagnant property markets.

It found stocks of finished goods were expanding to the highest level since the inception of the index in 2005, which economists said would trigger production cuts by manufacturers and hence accelerate the manufacturing downturn.

Meanwhile, another set of PMI data compiled by HSBC/ Markit dropped to a 32-month low of 47.7 last month from 51 in October, underlining a solid deterioration in manufacturing activity.

A Hang Seng Bank research report yesterday forecast interest rates would be cut three times by 25 basis points each time over the next 12 months.