Manufacturing News

China manufacturing activity weak in July

A pair of indexes on Chinese manufacturing activity in July reinforced views that the economy is cooling and added to concerns that deflation might return.

CLSA said its purchasing managers' index for China had risen to a seasonally adjusted 51.5 in July from 51.0 in June. That signaled a slightly stronger rate of improvement in the country's manufacturing sector but was still the third-weakest level since the index was launched in April 2004.

That conflicted with China's official PMI, which fell for the fourth straight month in July, to 51.1 from 5.17 a month earlier.

The rise in the CLSA index, the first since March, mainly reflected brisker growth in output and new orders, with more than a quarter of manufacturers surveyed reporting increases in both categories.

A reading of the index above 50 indicates manufacturing expansion; a reading below 50 shows contraction.

Despite the July pick-up, growth rates for both output and new business remained below the survey's long-run averages.

This reflected the oversupply of certain products, with manufacturers of basic metal goods in particular reporting an imbalance between the supply and demand for their products.

"The margin squeeze in China shows no signs of letting up although, for domestic producers, the small revaluation of the renminbi will have had some relieving effect from late July onwards — assuming, of course, that the margin enhancement is not met with further output price falls," said Jim Walker, CLSA's chief economist.

China revalued the yuan, or renminbi, by 2.1 percent on July 21 and said its value would henceforth be managed with reference to a basket of currencies instead of being pegged to the dollar.


The trend of falling prices has reignited debate in Chinese economic circles over whether deflation, which dogged the economy for several years in the late 1990s and in 2002, will return.

Several high-profile Chinese economists were quoted in state media on Monday and over the weekend as saying that industrial overcapacity would trigger mild deflation this year and next.

"Decreasing growth of the consumer price index, dropping enterprise profits, as well as losses in downstream industries are all signals that China's economy has taken a cooling trend," the Xinhua news agency quoted Wang Jian, a top researcher with the National Development and Reform Commission, as saying.

Statistics office spokesman Yao Jingyuan was quoted by the China Securities Journal as saying that Chinese people may begin to curtail consumption out of concern that falling corporate profits could lead to layoffs.

China said the fall in its official PMI was due to a variety of factors, ranging from weaker export orders in July to power crunches that hit output.

The industrial cooling seen in figures such as the PMI has yet to be reflected in China's headline gross domestic product growth, which was an annual 9.5 percent for the second quarter, the eighth straight quarter of growth over 9 percent.

"But because the PMI has the significance of being a leading indicator, the falling trend may presage the possibility that the economy will show a downward trend in the second half," the report quoted index analyst Zhang Liqun as saying. (Additional reporting by Alan Wheatley)

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