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China says manufacturing slows in May

China’s manufacturing expanded at the slowest pace in nine months in May as the government extended a campaign to cool inflation and the property market, a survey of companies indicated.

The Purchasing Managers’ Index was at 52 from 52.9 in April, the China Federation of Logistics and Purchasing said in an emailed statement. The number was higher than the median forecast of 51.6 in a Bloomberg News survey of 16 economists. The index has a seasonal pattern of falling in May, economists said before the release.

Premier Wen Jiabao has yet to tame inflation in the fastest-growing major economy as food and housing costs climb, McDonald’s Corp. charges more for soft drinks, and a drought in Yangtze River areas threatens grain output. The Shanghai Composite Index has fallen about 10 percent from this year’s high in April, and analysts have pared economic growth forecasts as monetary tightening starts to bite.

“Chinese economic growth is cresting,” Yao Wei, a Hong Kong-based economist with Societe Generale SA, said before Wednesday’s release. “The tightening stance is likely to continue for at least two months,” said Yao, adding that inflation may peak this month at an annual rate of about 6.5 percent.

For the manufacturing index, a reading above 50 indicates an expansion. The measure is based on a survey of purchasing managers in more than 820 companies and released by the logistics federation and the statistics bureau. 
A worker manufactures cotton yarn at a factory in Dali county, Shaanxi province, China. (Bloomberg)
A worker manufactures cotton yarn at a factory in Dali county, Shaanxi province, China. (Bloomberg)

The Chinese economy expanded 9.7 percent in the first quarter from a year earlier, while consumer prices exceeded the government’s 4 percent target in each of the first four months of this year. Nomura Holdings Inc. has trimmed its 2011 growth forecast to 9.4 percent from a previous estimate of 9.8 percent, after cuts by Goldman Sachs Group Inc. and JPMorgan Chase & Co.

The nation risks an “excessive downturn” if tightening measures last too long, Ba Shusong, a researcher at the State Council’s Development Research Center, said in a commentary published May 24. Non-deliverable yuan forwards fell in May by the most since November on speculation that a weaker economic expansion will encourage officials to slow the pace of the currency’s appreciation against the dollar.

Signs that the economy is cooling include weaker gains in industrial production. Car sales slipped in April and power shortages may also trim the nation’s expansion. The government is raising electricity prices for businesses and farmers in 15 provinces starting Wednesday, giving an incentive for generating companies to bring more supply online. (Bloomberg)







Auto sales may fall 10 percent this year with the end of government stimulus policies and restrictions on car licenses, according to the China Automotive Technology & Research Center. BYD Co., the Chinese carmaker backed by Warren Buffett, had an 11 percent drop in April sales, it said last month.

Capital Economics Ltd. analysts said before Wednesday’s statement that the manufacturing index has a “strong seasonal pattern” of declining in May each year.

“Given current growth concerns, there is a risk of market overreaction to what may be a normal seasonal decline,” London- based economist Mark Williams said in a note Tuesday. “Our view remains that the ongoing economic slowdown is gentle and highly unlikely to lead to a hard landing.”

Inflation was 5.3 percent in April, down from an almost three-year high of 5.4 percent in March. Wen said May 1 that the government is determined to bring home prices to a “reasonable” level in cities where gains have been excessive.

A slowing in food-price inflation “seems to have reversed somewhat recently,” JPMorgan Chase & Co analysts said in a May 30 note. The price of pork, a Chinese staple, rose 35 percent in April from a year earlier and food cost may be pushed higher if a drought in the Yangtze River area persists, the note said.

The central bank has boosted key interest rates four times since mid-October and also ratcheted up lenders’ reserve requirements. 

(Bloomberg)
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