Unexpected dip in manufacturing in China as orders fall

MANUFACTURING IN China contracted unexpectedly in August for the first time in nine months on the back of falling new orders and sluggish industrial production, the latest sign the world’s second-largest economy is slowing.

The purchasing managers index fell to a lower-than-expected 49.2 in August from 50.1 in July, according to data from the National Bureau of Statistics and China Federation of Logistics and Purchasing.

With few signs of any respite from the euro zone or the United States, the data strengthens the case for further policy steps to bolster growth. It also comes just ahead of a transfer of power to a new Communist Party leadership.

“The PMI continued to dip in August to a point below 50 per cent, which shows the manufacturing sector is contracting,” Zhang Liqun, an analyst with the State Council’s development research centre, told the Xinhua news agency.

China’s gross domestic product grew 7.6 per cent in the second quarter from a year earlier, the slowest pace in three years and the sixth straight quarter of slower growth. Slowing economic growth is hitting demand in the manufacturing sector, while industrial corporate earnings fell by the most this year in July, according to data last week.

Weak company profits figures meant that on Friday, the benchmark Shanghai Composite Index hit its lowest level since February 2009, capping a fourth month of losses.

The People’s Bank of China cut interest rates in June and July and has lowered the reserve-requirement ratio for banks three times since November as the government tries to kick-start lending and boost growth.

The less aggressive policy action is likely to mean delayed and weaker growth recovery in the second half, according to UBS economist Wang Tao.

Industrial output growth is estimated to have eased to 8.9 per cent from a year earlier in August, which would be the first reading below 9 per cent since May 2009.

“We think export growth may have rebounded somewhat but remained weak, while imports have been weighed down by destocking and falling commodity prices,” she said in a research note.

In a tour of southern China last week, premier Wen Jiabao said China needed to steady export growth so the country would meet its a 7.5 per cent growth target.