Singapore -- (SBWIRE) -- 11/18/2011 -- China has reported an unexpected drop in manufacturing activity raising fresh concerns about the impact of a global slowdown on its economy.
China is heavily reliant on exports to drive its economy - the second largest in the world - and the downturn in key US and European markets is already hurting manufacturers who employ millions of workers. The official purchasing managers' index (PMI) - based on a survey of 820 manufacturers - dropped to 50.4 in October from 51.2 in September, 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 the sector is expanding, while a reading below 50 suggests a contraction. Shares in China rose last week on speculation that more easing is possible after the government offered tax breaks for smaller companies that have been hardest hit by lending curbs and slowing growth.
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. The drop suggests cost pressures on companies are decreasing, although it may also signal destocking is increasing because of expectations prices will fall. China's economic growth has been powered by the success of its manufacturing and export sector. However, fears of a slowdown in the US and Europe, two of the biggest markets for Chinese exports, have raised concerns on whether the sector can sustain its growth. Manufacturers are feeling additional pressure from Beijing's tightening monetary policy as it tries to bring down inflation as prices sit near three-year highs above six percent. As well as raising interest rates five times since October last year, leaders have also ramped up the amount of money banks must hold in reserve, effectively restricting the amount they can lend, in turn weighing on economic growth.
A privately compiled version of the PMI, published by HSBC, printed at 51.0, rising from a mildly contractionary 49.9 reading in September.
HSBC said manufacturing activity in Taiwan contracted further in October to 43.7 from 44.5 in September, while South Korea saw a slight improvement with its reading increasing to 48 in October from 47.5 in the previous month. Despite the similar results from the two PMI surveys, comments accompanying the data painted somewhat different pictures. Some economists said that the official PMI result’s worse-than-expected showing was likely due to fewer working days in October. Even if Chinese economic growth slows from last quarter’s 9.1% to an average 8% growth next year, as some economists predict, it would still mark a healthy expansion for the country.