China factory output slows

China's factory sector grew at its slowest pace in 28 months in June as new orders expanded less quickly, with weaker global demand and tight monetary policy at home pinching production.

Although the moderation in activity did not point to a sharp drop-off in Chinese economic growth for now, the data was slightly worse than forecast and led some analysts to predict China may be less aggressive in tightening monetary policy conditions later this year.

The official purchasing managers' index (PMI), designed to provide a snapshot of conditions in China's vast manufacturing sector, fell to 50.9 in June, below expectations for a reading of 51.3 and down from 52 in May, the China Federation of Logistics and Purchasing said today. The 50-point level demarcates expansion from contractions.

A separate PMI survey by HSBC showed growth in overall factory production came close to stalling in June, confirming preliminary findings released last week. Its PMI reading stood at 50.1, with output falling for the first time since July 2010 amid lacklustre demand and power shortages.

With the US economy sputtering and Europe fighting a debt crisis, global investors are especially sensitive to any wobble in activity in China, a bastion of fast growth.

London copper prices fell about 0.6 per cent in Asian trade today after the China data, but Asian stock markets were higher, hoping that an unexpectedly strong pick-up in business activity in the US Midwest signalled its economy was powering through its recent soft patch.

In a sign that China is not insulated from the troubles of its major trade partners, the official sub-index for new export orders in the PMI fell to 50.5 in June from 51.1 in May, reflecting persistent weakness in global demand. Backlogs of orders shrank for a second straight month.

The official PMI showed new orders and exports orders were still growing, though at a much slower pace than May, while the HSBC PMI indicated new export orders fell for a second straight month.

The PMI also showed factory input prices continued to rise sharply in June, albeit at a slower rate than in May, though cooling demand may prevent manufacturers from passing all of those price rises through to consumers in the near term.

Still, not all economists were convinced Beijing is ready to relax policy just yet since it is perennially worried that high prices could stir social unrest and threaten its leadership.

Official rhetoric from Beijing suggests its focus is still very much on taming price pressures.

Earlier this week, premier Wen Jiabao signalled for the first time that China would struggle to meet its 4 per cent 2011 inflation target, underlining expectations that interest rates will rise further even as economic growth slows.

Reuters