Govt action puts brakes on China manufacturing

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. 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 prices in the fastest-growing big economy as food and housing costs climb, McDonald's charges more for soft drinks, and a drought in Yangtze River areas threatens grain production.

Yesterday's data suggested moderating economic growth may aid his campaign, with input-price inflation easing as manufacturers' orders and output grew at a slower pace.

"The data suggests continued moderation in industrial activities," said Li Wei, a Shanghai-based economist at Standard Chartered Bank. At the same time, the reading was strong enough to alleviate "fears of a sharp slowdown, and thus marginally increases the chance of a further rate hike in the near term," Li said.

The nation's fifth interest-rate increase since mid-October may come as early as this weekend, which is extended by a holiday on Monday, the economist added.

A separate PMI released yesterday indicated the weakest manufacturing growth in 10 months. That index, released by HSBC Holdings and Markit Economics, is based on a survey of more than 400 companies, while the data released jointly by the logistics federation and the statistics bureau covers more than 800.

The Shanghai Composite Index has fallen more than 10 per cent from this year's high in April, and analysts have pared economic growth forecasts as monetary tightening starts to bite.

Slower expansions in the Asia-Pacific region may fuel concern that growth will falter in a global economy already hampered by Japan's disaster and Europe's debt crisis.

India's expansion cooled in the first quarter even as inflation pressures persisted, a government report showed yesterday. Australia's economy shrank by the most in 20 years because of natural disasters, a statistics bureau report showed yesterday.

Zhang Liqun, a senior researcher at the State Council's Development Research Centre, said he saw an increased possibility that China's economic growth will moderate, adding that destocking by companies may be a factor.

China's economy expanded 9.7 per cent in the first quarter from a year earlier, while consumer prices exceeded the Government's 4 per cent target in each of the first four months of this year. Nomura Holdings has trimmed its 2011 growth forecast to 9.4 per cent from a previous estimate of 9.8 per cent, after cuts by Goldman Sachs Group and JPMorgan Chase.

The nation risks an "excessive downturn" if tightening measures last too long, Ba Shusong, a researcher at the State Council's Development Research Centre, said in a commentary published May 24.

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.

Auto sales may fall 10 per cent this year with the end of government stimulus policies and restrictions on car licences, said the China Automotive Technology & Research Centre.

Inflation was 5.3 per cent in April, down from an almost three-year high of 5.4 per cent in March. Societe Generale said the annual rate may peak this month at about 6.5 per cent.

A slowing in food-price inflation "seems to have reversed somewhat recently", JPMorgan Chase analysts said in a May 30 note.

Premier Wen said on May 1 the Government was determined to bring home prices to a "reasonable" level in cities where gains have been excessive.

Besides boosting key interest rates, officials have ratcheted up lenders' reserve requirements and imposed limits on home purchases.

- Bloomberg