China PMI Drops to Lowest in Almost 3 Years

By Bloomberg News - Nov 1, 2011 9:39 AM GMT+0700

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy.

The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market. South Korea reported today the weakest export growth since 2009 and Taiwan’s government said yesterday that the island’s economy expanded by the least in two years.

The PMI reading “is a reflection of slowing momentum in the economy” and exports may “slow sharply in coming months,” said Wang Tao, a Hong Kong-based economist at UBS AG. “Policy will ease more visibly in the first quarter of 2012.”

A separate manufacturing index released today by HSBC Holdings Plc and Markit Economics rose to 51 from 49.9. The surveys have different sample sizes and methodologies.

Premier Wen Jiabao said last week that economic policies will be “fine-tuned” as needed. That fueled speculation that the government may ease reserve requirements for smaller banks and add fiscal stimulus, putting growth ahead of inflation risks.

‘Weak’ Figure

The MSCI Asia Pacific Index fell 0.9 percent as of 11:07 a.m. in Tokyo. The benchmark Shanghai Composite Index rose 0.3 percent on speculation that more easing is possible after the government last month offered tax breaks for smaller companies that have been hardest hit by lending curbs and slowing growth.

“The weak PMI figure may prompt the government to loosen policies going forward such as a cut in reserve-requirement ratios for small banks and that’ll be positive for stocks,” Liu Li-Gang, head of Greater China Economics at Australia & New Zealand Banking Group Ltd., said in an interview in Bloomberg’s Shanghai office. “China’s economy is poised for a soft landing in the fourth quarter rather than a hard landing.”

On Oct. 26, the government announced a trial of changes to value-added taxes, a move that HSBC Holdings Plc economist Qu Hongbin said heralds the “official start” of selective easing. The finance ministry yesterday raised the threshold for payment of VAT and business taxes.

Exports, Orders

The manufacturing index from the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries. The gauge hasn’t fallen below 50, the level dividing expansion from contraction, since February 2009.

The gauge of new export orders declined to 48.6 from 50.9 the previous month. The new orders index fell to 50.5 from 51.3 in September, the lowest reading since February 2009. A measure of output dropped to 52.3 from 52.7 in September.

The data “indicate fourth-quarter economic growth will continue to slow,” Zhang Liqun, a senior researcher at the Development Research Center of the State Council, said in today’s statement. “Export and investment growth will continue to fall.”

China’s economy grew 10.4 percent in 2010 and 9.4 percent in the first nine months of this year.

Shipyard Orders Drop

Positive signs for policy makers include a decline in a measure of input prices to 46.2 in October from 56.6 the previous month, the first reading below 50 since March 2009.

The drop suggests cost pressures on companies are decreasing, although it may also signal destocking is increasing because of expectations prices will fall, Zhang said.

In a sign manufacturing growth is moderating, new orders placed at Chinese shipyards in the first nine months of the year dropped 42.8 percent, the Ministry of Industry and Information Technology said on its website on Oct. 20. Guangzhou Shipyard International Co. said last week its third-quarter net income dropped 45 percent from a year earlier due to higher costs and an impairment provision for shipbuilding contracts.

--Zheng Lifei, Victoria Ruan, With assistance from Ailing Tan in Singapore, Regina Tan in Beijing and Zhang Shidong in Shanghai. Editors: Nerys Avery, Paul Panckhurst

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net;

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net