China industrial sector shows marginal growth; PMI drops to 50.4

At 50.4, down from 52.7 in the previous month, the headline HSBC China Manufacturing Purchasing Managers’ Index – a seasonally adjusted index designed to measure the performance of the manufacturing economy – signaled only a marginal improvement in Chinese manufacturing sector operating conditions.

Manufacturing output in China fell during June, ending a 14-month period of expansion. Although only marginal, the pace of contraction contrasted with near-record growth registered at the start of the year.

For the first time in 15 months, the level of new business taken by Chinese manufacturing firms fell in June. The rate of decline in new work was only fractional, but marked a distinct turnaround from strong growth seen throughout Q1 2010. Those respondents that reported a drop in new orders widely commented that this reflected softer market demand. New orders placed by foreign clients also fell in June, with the pace of decline the fastest since March 2009. Manufacturers widely mentioned that reduced new export business reflected lackluster global demand.

Manufacturing employment in China rose for the thirteenth month running in June. The rate at which firms added to their workforce numbers was modest, though slightly faster than in the previous month. Manufacturers reported adding to their payrolls as part of efforts to expand productive capacity.

Output prices set by Chinese manufacturing firms fell for the first time in 12 months during June. Anecdotal evidence suggested that reduced output charges reflected lower input costs and, in some cases, client requests for price discounts.

Latest data signaled that average input costs fell in June, ending a sequence of inflation that had stretched to 11 months. Where a decline in cost burdens was signaled, companies widely attributed this to lower raw material prices.

In response to lower production requirements, purchasing activity in the Chinese manufacturing sector fell in June. The pace of reduction was only modest, but contrasted with rapid growth seen around the turn of the year. The fall in purchasing also reflected a utilization of existing pre-production inventories, which fell for the first time in seven months.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, chief economist for China and co-head of Asian economic research at HSBC, said: “The moderation in the manufacturing PMI implies slower sequential growth in China’s manufacturing sector, partly due to the tightening measures taking effect. But fears about hard-landing are overplayed. We expect China to achieve around 9 percent growth in the second half underpinned by massive ongoing investment and robust private consumption.”