China: Manufacturing Slide Shocks Markets

Markets were rattled yesterday by the news that Chinese manufacturing activity contracted sharply this month to a 32-month low.

The HSBC's initial "flash" reading of its China manufacturing survey fell to a contractionary reading of 48.0 for November, well below forecast and down from the mildly expansionary 51.0 reading for October.

Market forecasts for the HSBC 'flash' manufacturing Purchasing Managers Index had called for a 50.1 reading, just about the 50 level that separates expansion from contraction.

And surveys of manufacturing and services in Europe showed another contraction. European industrial production plunged to three year lows in September.

Sharemarkets across much of Asia extended losses following the Chinese data; with the Hang Seng Index trading lower and the Australian market also saw its recent weakness extended.

Hong Kong and Australia were both down near 1.9% by the close yesterday.

Australia was off 1% before the release in the early afternoon and the market loss accelerated after that to nearly double the fall by the end of trading.

The Shanghai market was off by 0.4% and was actually positive for a time during trading. Tokyo was closed for a holiday.

Complicating matters for investors was a cut in the second estimate of US economic growth to 2% (annual), from the 2.5% first estimate.

And there were also reports that the 90 billion euro bailout of Dexia Bank by Belgium and France was in trouble, a story denied by French officials.

European markets were down sharply overnight as well, losing between 1% and 2.5%.

Wall Street fell for another day.

Copper, gold and oil fell, while the US dollar rose and the Aussie fell to 97 US cents.

News of the contraction in Chinese manufacturing will pressure Chinese authorities to loosen the current tight monetary policy. Already there are suggestions the government could be waiting for an opportunity to do that.

The People's Bank of China said last week that it "will continue the prudent monetary policy ... and fine-tune macroeconomic policies when it is appropriate in accordance with changes in the domestic and global economic situation.

'The central bank said it will maintain reasonable credit growth and continue interest rate liberalization and Yuan exchange rate reforms," comments some commentators took to meaning that if there was a slide in the economy, policy would be changed.

The news came a day after the World Bank expressed confidence that the Chinese economy would continue to see solid growth this year and for some years to come.

It was a reminder that this won't be without some disruptions with news of a sharp contraction in manufacturing activity in November.

The flash PMI includes roughly 85%-90% of total responses which comprise the final version, due out next week.

The HSBC survey is taken predominantly from the small and medium business sectors in China which seem to have been hit harder than larger companies which provide data for the official PMI survey which will be out on December 1.

The final reading for the HSBC survey will be issued the same day.

"The dipping headline manufacturing PMI implies that industrial production growth is likely to slow further," HSBC Chief Economist for China Hongbin Qu said in a statement.

That's a change from earlier in the year when the PMI dipped just under the 50 level for three months.

Then HSBC said the slight contractionary reading was still conducive to industrial production of around 12% to 13%, which it has been for most of 2011.

"Industrial production growth is likely to slow further to 11-12 percent year-on-year in coming months as domestic demand cools and external demand is set to weaken," Qu Hongbin, said in the statement.

In line with the weak overall figure, the flash output sub-index tumbled to a 32-month low of 46.7, a steep drop from October's final reading of 51.4.

The sub-indices for input and output prices sunk around 10 points each to below 50, hugging lows last seen in April 2009: an indication that price pressures are easing more quickly than thought.

New export orders were the only bright spot in the survey, holding steady from October to stay above 50.

But the sub-index for new orders suffered its biggest drop in over a year to well under the 50-point mark, suggesting factories received fewer orders on the whole in November even though export orders held up.

The flash reading is the lowest since March 2009, as the Chinese economy (and the rest of the world) emerged from the GFC induced recession.

The last time the PMI slipped below 50 was last September, when the index hit 49.9. It bounced in October to that 51 reading.

The World Bank said Tuesday it sees a soft landing for China's economy, with domestic consumption helping to offset a slowdown in production and expenditure, although it warned of rising risks of a sharper downturn.

The Bank said its base view was for China's economy to grow 8.4% next year and experience "roughly similar" rates of growth in the following years.

China's growth, averaging around 9.4% in the first nine months of this year, will likely close out 2011 with a 9.1% expansion, which means a dip under 9% in the final quarter.

Inflation is falling; down to 5.5% annual in October from 6.1% the month before and producer prices are falling even faster. Next year it could fall to average 4.1%, according to the World Bank.

The Bank said that China's huge investment stimulus unveiled during the 2008 financial crisis is one area where "concerns have heightened" as well as the property market, though overheating concerns were no longer such a worry as the market has cooled more recently.

"Policymakers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still buoyant, if not overheated, economy," the Bank said in its East Asia and Pacific Economic Update.

Adding to the pressures are continuing reports of the Chinese property market slowing, which in turn is worrying banks, investors and causing real estate construction and investment to weaken.

That's why crude steel production has been easing since May and iron ore and coal imports are softening noticeably (see separate story on global steel output).