Chinese manufacturing slows

1 Dec

 

Even adherents to the belief that China is about to burst will take no cheer from the news that Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy.

The purchasing managers index (PMI) fell to 49 last month, down 1.4 points from October, marking the first contraction since March 2009, it is reported. A reading of 50 indicates the line between expansion and contraction.

Another survey, the HSBC manufacturing activity index, also fell to a 32-month low of 47.7 in November from 51 in October.

The data was released hours after the China eased monetary policy for the first time in three years, with the central bank cutting the amount of money banks need to hold in reserve to boost lending and counter the slowdown.

The FT notes that in a surprise move that was clearly timed to offset the negative impact of the PMI number, China’s central bank on Wednesday kicked off a new round of monetary easing by announcing a cut in the reserve ratio for banks for the first time in three years.

Chinese factories are slowing

“The markets have been handed a powerful one-two combo, in the form of a shocking PMI print and an aggressive RRR cut,” said Alistair Thornton, China analyst at IHS Global Insight. “The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring.”

Most analysts did not expect monetary easing to begin until the first quarter of next year at the earliest, but Beijing is facing the prospect of a stall in its two biggest growth engines – exports and real estate. Policymakers are now more concerned about supporting growth than tackling inflation and are expected to announce more monetary loosening measures in the coming months.

That reverses two years of gradual monetary tightening in which the government has been trying to cool growth and rein in persistently high price increases in a campaign that appears to have been largely successful.

It is certain that the Government will now be taking an even closer eye on Europe, its main trading partner. Not intervening in the sovereign crisis may not be an option if Chinese manufacturing is damaged further.

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