January 5, 2009-- China’s manufacturing shrank for a third month as exports fell and companies ran down inventory, worsening the slowdown in the world’s fourth-largest economy.

 

The Purchasing Managers’ Index rose to a seasonally adjusted 41.2 in December from 38.8 in November, the China Federation of Logistics and Purchasing said today in an e-mailed statement. A reading below 50 indicates output contracted.

 

China’s growth may have slipped to 5.5% last quarter, the weakest pace in at least 15 years, as recessions in the US, Europe and Japan cut demand for exports, according to Shanghai- based Industrial Bank Co. The government has drawn up policies to support the steel and automobile industries through the slowdown, Premier Wen Jiabao said on January 2.

 

“The December index shows China’s economy continues to decline, but there are some signs of bottoming out,” said Zhang Liqun, an economist at the State Council Development and Research Center. “As macroeconomic policies start to take effect, the pace of the slowdown will stabilize.”

 

A measure of export orders rose to 30.7 from 29 in November. The output index jumped to 39.4 from 35.5. The new-order index rose to 37.3 from 32.3. November’s levels were the lowest for each of those indexes since the survey began in 2005.

 

“Exports have only just started to shrink and it’s going to get worse,” said Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong.

 

 

Manufacturing shrank for a fifth month, according to a separate purchasing managers’ index, released on January 2 by CLSA Asia-Pacific Markets. A 4 trillion yuan ($USS585 billion) economic stimulus package, announced by Wen in November, is yet to kick in.

 

Companies in industries from metals to toys are reducing production or closing down. Aluminum Corporation of China, the nation’s biggest maker of the metal, cut output as prices fell.

 

“The government’s planned investment may start to revive economic growth from the second quarter,” Wang said.

 

Industrial profits grew at the slowest pace on record in November and car sales fell the most in more than three years. Overseas shipments fell in November for the first time in seven years and industrial output grew by the smallest margin in almost a decade.

 

Fuyao Group Glass Industries, China’s biggest maker of windshields, said December 31 that it will stop two production lines for making glass in Hainan province .

 

 

Slowing home construction and overcapacity forced glassmakers to halt about 40 production lines nationwide, said Jiang Xueqing, an analyst at Shenyin Wanguo Research and Consulting Co. in Shanghai.

 

The economic slide may intensify pressure on the central bank to keep cutting interest rates after five reductions in three months and as the government rolls out infrastructure spending.

 

Central bank Governor Zhou Xiaochuan pledged December 31 to continue a “flexible” monetary policy. Capital Economics forecasts the key one-year lending rate will fall by at least 81 basis points from 5.31% in the first half of this year. A basis point is 0.01% point.

 

To help boost consumption, subsidies for farmers to buy household appliances will rise to 15 billion yuan in 2009 from 9 billion yuan in 2008, Wen said Jan. 2.

 

Overcapacity in almost all industries and declines in commodity prices may keep damping production, Li Yizhong, head of the Ministry of Industry and Information Technology, said last month.

 

 

Output growth may not recover until the second or third quarter when inventory returns to “normal levels,” according to Yi Gang, a central bank vice governor.

 

China’s economy expanded 9% from a year earlier in the third quarter of 2008, the least since 2003. The World Bank forecasts a 7.5% increase in 2009, the smallest in almost two decades.

 

The PMI is published jointly by the logistics federation and the National Bureau of Statistics. The index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

 

The survey tracks changes in output, new orders, export orders, employment, inventories, input costs and output prices.