China's Manufacturing Contracts for Second Month

By Nipa Piboontanasawat

Sept. 1 (Bloomberg) -- Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy.

The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

China has halted gains by the yuan and loosened lending quotas to help exporters and small businesses after four quarters of slowing economic growth and as global demand weakens. The government is considering spending an extra 400 billion yuan ($58 billion) to stimulate expansion, according to economists and reports in domestic news media.

``Economic growth will continue to slow in the third quarter,'' said Wang Qian, an economist at J.P. Morgan in Hong Kong. ``We expect more fiscal stimulus and a slower pace of currency appreciation.''

The CSI 300 Index of stocks fell 2.9 percent as of 11:30 a.m. in Shanghai. The yuan rose to 6.8346 against the dollar after closing at 6.8350 last week and in August posting its first monthly loss since May 2006.

July's contraction was the first since the survey, conducted jointly with the statistics bureau, began in 2005.

A second PMI, released today by CLSA Asia-Pacific Markets, also showed manufacturing shrank last month. It was the first contraction recorded by that survey since November 2005.

Slower Growth

China's economic growth cooled to a 10.1 percent annual rate in the second quarter from 10.6 percent in the three months through March.

Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on exports for the rest of the year. Since July, Chinese policy makers have put extra emphasis on sustaining the economy's expansion rather than cooling inflation.

A plan awaiting approval from the State Council and the National People's Congress includes 220 billion yuan of spending and 150 billion yuan of tax cuts, the Beijing-based Economic Observer newspaper reported last week.

Restrictions during the Olympic Games on transport, power consumption and output played a key role in curbing activity last month, CLSA said in a statement.

In the government-backed survey, the index of new orders fell to 46 in August from 46.2 in July. The index of export orders climbed to 48.4 from 46.7, while the output index rose to 48.7 from 47.4.

Producer Prices

The index of input prices dropped to 57.8 from 71.3, ``which may mean that producer prices have already reached a peak,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.

Producer prices jumped 10 percent in July from a year earlier, the fastest pace since 1996, underscoring the risk of a rebound in inflation. Consumer prices rose 6.3 percent.

The index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction.

The government and CLSA surveys often conflict and some economists question their accuracy.

Mark Williams, an economist at Capital Economics Ltd. in London, said last month that swings in the government survey were not matched in activity data, making it ``a less useful leading indicator.''

Still, he said then that it was ``clearly flashing a warning signal.''

Output, New Orders

The CLSA PMI fell to a seasonally adjusted 49.2 from 53.3 in July. The output index fell to 46.1 from 53.4, while the index of new orders declined to 49.4 from 54.8. The index of export orders dropped to 49 from 51.8.

``Manufacturing growth in China is slowing but nowhere near as rapidly as the drop in the August PMI suggests,'' said Eric Fishwick, head of economic research at CLSA in Singapore. ``Most firms that reported activity lower in August attributed this fact to the Olympics.''

The CLSA index, started in April 2004, is based on a survey of more than 400 manufacturing companies. The survey tracks changes in output, new orders, export orders, employment, inventories, input costs and output prices.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net