Purchasing surveys reflect downturn

The mainland's vast manufacturing sector contracted for a second month in December as demand at home and abroad slackened, a purchasing managers' survey showed yesterday.

The HSBC purchasing managers' index inched up to 48.7 in December from 47.4 in November, but still short of the 50 threshold that indicates expanding manufacturing.

'While the pace of the slowdown is stabilising somewhat, weakening external demand is starting to bite,' said Qu Hongbin, China economist at HSBC.

'This, plus the ongoing property market corrections, adds to calls for more aggressive action on fiscal and monetary fronts to stabilise growth and jobs.'

Huo Deming, a professor at the China Centre for Economic Research at Peking University, said the reading showed a lack of confidence in the business community towards the country's economy.

'Compared with 2011, China's economy is facing more uncertainties,' Huo said, adding that if the central government did not use more stimulus policies and continued restrictive regulations on housing purchases, growth next year would be about 8.5 per cent.

Huo said managers were worried the European debt crisis would deteriorate and that the US economic recovery would falter.

The HSBC PMI has been mostly under 50 since July. But official figures in the National Bureau of Statistics own PMI fell to 49 last month from 50.4 in October, the first contraction in the manufacturing sector since February 2009.

The National Bureau of Statistics PMI survey for December will be published tomorrow.

As with the HSBC survey, a reading below 50 indicates a contraction in activity from the previous month, while anything above that indicates growth.

The latest figures suggest that pro-growth policies will be adopted to bolster growth. The People's Bank of China is widely expected to lower its requirement for the amount of cash held as reserves to allow banks to inject more cash into the economy to fight headwinds from Europe's debt crisis and continuing weakness in the US economy.

'Banks' required reserve ratios will surely be cut,' said Huo. 'There is a big chance this will occur before the Chinese New Year on January 22.'

Beijing announced a cut in the reserve ratio requirement - the proportion of assets banks must retain, rather than lend out or invest - for commercial lenders in late November for the first time in three years, signalling a looser monetary policy stance.

The ratio remains at 21 per cent for big banks, giving the central bank plenty of room to cut and free up funds that could be used for lending.

Inflation, which is the top concern of Beijing, slowed to 4.2 per cent in November, from a three-year high of 6.5 per cent in July, also providing room for the central government to ease monetary policy.