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China's HSBC PMI Index Falls Below 50 In July

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HSBC's China Purchasing Managers' Index fell below 50 in July for the first time in a year, signalling China's vast manufacturing sector is shrinking slightly as tight monetary policy and weak global demand hurt factories.

The HSBC purchasing managers' index (PMI), which previews business conditions in a range of industries before official monthly output data releases, fell to 49.3 in July from June's 51.6.

In PMI releases around the world, the 50-point level typically demarcates expansion from contraction in factory output.

But HSBC has made clear that in China, while a reading below 50 signals contraction on the month, it still points to solid growth of between 11-13 per cent on the year in factory output. That should help China's economy grow 9 per cent annually.

"The current level of the PMI is still consistent with a 12-13 per cent growth rate of industrial production, which leaves room for Beijing to keep tightening policy through the third quarter to check inflation," said Qu Hongbin, an HSBC economist.

Still, Qu noted the moderation in China's industrial activity and attributed the slowdown to steady policy tightening and weak foreign demand.

Indeed, the manufacturing output sub-index fell to its lowest since March 2009 of around 48, from June's 49.8, while new export orders fell for the third straight month. Growth in new orders also ground to a near standstill.

Despite slower factory production, factory inflation quickened a bit. Even so, price pressures were tame and well under highs seen in November last year.

The final reading for HSBC's China PMI is better than a flash PMI published by the bank, which stood at 48.9 in July.

The report by British research firm Markit also pointed out the following:

  • Some firms attributed the drop in output to shortages in electricity and raw materials, as well as machinery maintenance.

  • The seasonally adjusted new orders index has fallen almost seven points since the start of the year, with firms cited softening underlying market demand as the biggest drag.

  • Average input prices continued to rise, with almost one-fifth of firms reporting an increase in costs of raw materials and other inputs.

  • The finished goods price index rose again, pushed up by rising input prices. But the increase was the smallest in a year.

  • About 18 per cent of surveyed firms said purchases of raw materials have fallen from the previous month due to lower production requirements, but HSBC noted the decline was marginal.

  • Manufacturers reported their stocks of raw materials and semi-finished goods fell for the seventh straight month, dropping at the fastest rate in 28 months.

  • Almost 90 per cent of firms reported no change in staff numbers this month, with the employment index dropping slightly, mainly due to lackluster new business and retirements.