Country feels strain as manufacturing falls to 11-month low

A decline in worldwide demand for Chinese goods has hit exporters. Photo / AP

China's manufacturing activity has fallen to an 11-month low, according to a survey released yesterday that adds to pressure on Chinese leaders to reverse a deepening slowdown in the world's second-largest economy.

The report by HSBC comes as expectations mount that Beijing will launch stimulus measures to shore up growth that fell to a two-decade low of 7.5 per cent in the latest quarter. HSBC said the preliminary version of its monthly purchasing managers index declined to 47.7 this month from June's 48.2 on a 100-point scale on which numbers below 50 show a contraction in activity.

The decline adds to pressure on the labour market and "reinforces the need to introduce additional fine-tuning measures to stabilise growth", said HSBC economist Hongbin Qu in a statement.

China's top economic official, Premier Li Keqiang, was quoted by newspapers on Tuesday as saying the "bottom line" for growth was 7 per cent. Financial markets rose on expectations that meant Beijing might take steps to reverse two straight quarters of declining growth.

A stimulus would temporarily set back Beijing's efforts to nurture self-sustaining growth based on domestic consumption and reduce reliance on exports and investment. But communist leaders might feel compelled to backtrack if a sharper-than-expected slowdown raises the risk of job losses and political tensions.

China's slowdown is largely self-imposed. The Government has tightened controls on investment and real estate development as part of its effort to shift the basis of growth. But a slump in global demand for Chinese goods has hurt exporters and pushed growth down more sharply than expected.

Growth also has been dented by a crackdown this year on a boom in bank lending. Tighter lending controls caused a temporary shortage of credit in financial markets last month. Further controls, especially on unregulated private lending that supports entrepreneurs, could hurt companies that generate most of China's new jobs and wealth.

The International Monetary Fund last week cut its 2013 growth forecast for China this month to 7.8 per cent from its 8.1 per cent outlook in April. Nomura economist Zhiwei Zhang has said growth could dip below 7 per cent in coming quarters. The latest figures appeared to bear out forecasts of a further slowdown.

Companies reported output and orders declined at a faster rate this month, according to HSBC. The preliminary report is based on 85 to 90 per cent of responses from the 420 manufacturing companies surveyed each month.

A decline in Chinese economic activity could have global repercussions, denting revenues for suppliers of commodities and industrial components such as Australia, Brazil and Southeast Asia.

Chinese leaders have promised to launch reforms aimed at making the economy more productive and helping entrepreneurs. But no major changes are expected until after a Communist Party meeting in the autumn.

This month, the central bank and the bank regulator promised changes in the government-run banking industry to increase credit to entrepreneurs and more productive firms. It gave no timetable.

Last week, the central bank lifted controls on interest rates Chinese banks can charge on loans. Analysts said that might lead to lower borrowing costs for private companies but they said there should be little short-term change in the heavily regulated financial system.

- AP