Slowdown and factory weakness
July 21, 2011 by Jules
HSBC PMI reading a China manufacturing recession
This excellent article appeared in the SCMP today:
Manufacturing in the mainland has shrunk for the first time in a year amid economic tightening, with fears the worst is yet to come.
The HSBC/Markit twice-monthly survey of the purchasing managers' index, known as the "flash PMI", fell to 48.9 earlier this month from 50.1 last month. A figure below 50 indicates manufacturing is contracting.
Some economists and factory owners said the mainland's manufacturing sector would have to brace for more upheavals as inflation, the European debt crisis and an unstable economic outlook in the United States showed no signs of abating.The reading is the lowest in 28 months and reveals sluggish new business investment and weaker demand at home and abroad.
They say anecdotal evidence suggested that recent bankruptcies of factories in the Pearl River Delta were triggered by tighter credit lending.
HSBC chief China economist Qu Hongbin expected industrial growth would taper off in coming months as the impact of the nation's tightening measures spread.
"Don't panic," Qu said. "Resilience in consumer spending and continued investment in a massive amount of infrastructure projects should support a nearly 9 per cent GDP growth for the rest of the year."
However, new business across the mainland appears to be slowing due to weaknesses in external and domestic demand.
The index revealed more bad news for manufacturers' profitability, with production prices exceeding output prices.
Hong Kong Small and Medium Enterprises Association chairman Danny Lau Tat-pong said an 18.6 per cent rise in the minimum wage in Guangdong in March, surging raw materials prices, and a record high yuan exchange against the greenback gave little room for survival.
He added that many smaller enterprises were in limbo as tighter lending choked off liquidity.
"Many factories are producing without profits," Lau said. "Most of their profitability is eroded by rising costs as factory owners may not be able to pass all the price increases to customers."
The yuan rose to a new peak of 6.4536 against the US dollar yesterday. Dongguan Soyea Toys, one of the oldest toy factories in Dongguan, went bankrupt last week, leaving 470 workers without their pay for June and the first half of July, according to Xinhua. Dingjia, a textile factory that employed more than 2,000 workers, also closed in the middle of last month.
Bank of America-Merrill Lynch economist Lu Ting said the flash PMI was "more downward-biased" than the official PMI compiled by the National Bureau of Statistics, saying that the HSBC/Markit survey covered 450 manufacturers while the statistics bureau tracked 730.