Chinese factories feel pinch from tight credit

Mainland factories produced at their slowest pace in nine months this month, the latest sign the manufacturing sector is struggling amid falling export orders and soaring credit costs.

Analysts forecast the weakness in manufacturing might persist for some time as Beijing focuses on financial risks to the economy and appears reluctant to inject fresh liquidity.

The State Council headed by Premier Li Keqiang has given no indication it is about to loosen the grip on credit. Instead, "stability" was repeatedly mentioned in a statement concluding a cabinet meeting chaired by Li on Wednesday. The cabinet pledged to push forward reforms "gradually, orderly and continuously" and vowed to "strictly" prevent financial risks.

Goldman Sachs economist Song Yu said: "The focus on financial risks has been the main driver of the recent liquidity tightening, and we expect it to slow growth in the near term."

However, he said the country might benefit from the new leadership's approach in the longer term. "The flip side to this new approach is that the reform measures should reduce systemic risks and possibly raise the level of potential growth," he said.

A preliminary survey of factory output released yesterday shows manufacturing businesses contracted for a second month.

The flash purchasing managers' index compiled by HSBC and Markit - which, unlike the official PMI, has a greater coverage on small and medium-sized private-sector firms - fell to 48.3 this month from a final reading of 49.2 last month. A reading below 50 indicates contraction.

Among the components of the index, new export orders slipped to 44 from 48.9, while production dropped to 48.8, an eight-month low, from 50.7.

The interbank interest rate has surged over the past two weeks, making it harder for companies, particularly smaller ones, to borrow money.

The overnight Shanghai interbank offered rate jumped to 13.44 per cent yesterday from 7.66 per cent on Wednesday.

Yesterday, however, the People's Bank of China added 50 billion yuan (HK$63.3 billion) to the financial system, Hong Hao, chief China strategist at Bank of Communications said last night.

The sum was supplied to a single lender, likely Industrial and Commercial Bank of China, through "targeted liquidity operations", and more banks were in talks to obtain financing, Hong told Bloomberg. Overnight funds were lent at 5.1 per cent and seven-day money at 5.4 per cent, he said, citing industry sources.

The Shanghai stock market dropped 2.8 per cent to close at 2,084.02 points yesterday, the lowest in six months, as confidence dimmed about a quick rebound of the economy.