UpdateChina November PMI signals contraction in industry output

01 December 2011 05:53  [Source: ICIS news]

By Dolly Wu and Nurluqman Suratman

China November industry output shrinks; PMI falls below 50%(adds comments from analysts, with recasts throughout)

SHANGHAI (ICIS)--China’s purchasing managers’ index (PMI) in November declined by 1.4 percentage points to 49.0% from October, indicating a contraction in manufacturing output for the first time in 32 months, official data showed on Thursday.

The PMI reading of the world’s second biggest economy was last seen in a contraction mode, with a reading below 50%, in March 2009.

Data from the China Federation of Logistics and Purchasing (CFLP) showed that the country’s barometer of manufacturing activities had continuously fallen from April to July. The PMI reading rebounded in August and September, before resuming falls in October.

The monthly declines in PMI indicate that the country's economic momentum is slowing down, said Zhang Liqun, an analyst at CFLP.

China’s economic growth has been decelerating since the start of the year, on account of the government’s implementation of a tight monetary policy. The pace of expansion in the third quarter slowed to 9.1% from 9.5% in the second quarter, and lower than the 9.7% clip recorded in the first three months of the year.

In November, the purchasing sub-index within the PMI declined by 1.8 percentage points month on month to 44.4%, indicating softer domestic demand. Business enterprises may be faced with a shortage of orders from this month to early next year, said Zhang.

Domestic industries are hurting from a credit crunch borne of China’s heavy and sustained monetary tightening measures implemented over the past two years that were meant to curb inflation, or the spikes in prices, particularly in the property sector.

“The decline in the [PMI] index reading was due largely to the weaker foreign demand, as well as the softening domestic demand amid the tight credit conditions and the cooling property sector in China,” said Hong Kong-based Li & Fung Research Centre in a note.

The PMI is based on a survey of 820 manufacturers across 20 industries. While the overall number registered a contraction in November, half the number of industries surveyed, including chemicals, oil refining and coking, pharmaceuticals, papermaking, garments and general machinery had a reading above 50%, the research firm said.

Within the November PMI, the new orders index fell by 2.7 percentage points from October to 47.8%, while the production index dropped by 1.4 percentage points to 50.9% in November, according to the official data from CFLP.

China’s import index in the PMI last month increased by 0.3 percentage points to 47.3%, while the export index fell by 3.0 percentage points to 45.6%, the data showed.

Chemicals, garments, footwear and related products, oil refining and coking, smelting of non-ferrous metals and tobacco were the industries that recorded imports growth in November, according to Li & Fung Research Centre in a report.

China remains as a leading importer of global products, including petrochemicals, especially now that demand from economies in the West is in the doldrums because of the eurozone debt crisis, said an analyst from brokerage Xingye Securities who declined to be named.

“Given the deepening crisis in Europe seemingly without a visible end, the subsequent contagion effects on the rest of the world will increasingly be apparent next year,” said Singapore-based DBS Group Research.

An expected deceleration in exports growth to 10% from 20% last year will weigh on the economy, slowing down China's growth to 8.5% next year from a projected 9% clip in 2011, it said.

Against this backdrop, the People’s Bank of China (PBoC) announced late on Wednesday that the reserve requirement of banks will be cut for the first time in three years on 5 December.

The banks' reserve requirement, or the portion of deposit that must be parked with the central bank, will be reduced by 50 basis points to 21%. The move is aimed at boosting lending and shoring up the economy.

“The November PMI final reading points to a sharp deterioration in business conditions across the Chinese manufacturing sector,” said Hongbin Qu, HSBC chief economist for China and co-head of Asian Economic Research, in a report.

HSBC's PMI for China – a composite indicator that gives a single-figure snapshot of operating conditions in the manufacturing economy – gave a reading of 47.7 for China in November, down from a 51.0 reading in October.

The cuts in reserve requirement indicated that economic growth has now become the top priority of the Chinese government, instead of controlling inflation, said Qu.

“This [cuts in reserve requirements] is likely to invite an across-the-board policy easing, which is likely to come as early as [the] year-end,” he said.

If the monetary easing measures can filter through the economy in the coming months, China can still achieve growth of more than 8% next year,” Qu added.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections 

By: Nurluqman Suratman

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