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China’s Manufacturing Growth Cools

A Chinese manufacturing index fell to the lowest level since February 2009, signaling that the world’s second-biggest economy is cooling as export demand weakens and the government reins in credit to control inflation.

The Purchasing Managers’ Index was at 50.9 in June compared with 52 in May, the China Federation of Logistics and Purchasing said in an e-mailed statement today. A separate survey showed manufacturing output declined for the first time since July 2010, HSBC Holdings Plc said today.

Pressure for additional monetary tightening may be easing after manufacturers’ input prices rose at the slowest pace since July 2010 in the logistics federation study. The People’s Bank of China has paused for 12 weeks in raising benchmark interest rates, the longest gap since increases began in October.

Today’s data “will further depress markets which have been increasingly worried about a hard-landing in China,” said Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch. “The good news is the weaker momentum of inflation.”

The level of the PMI compiled by the logistics federation and the statistics bureau compared with the median forecast of 51.5 in a Bloomberg News survey of 13 economists. A reading above 50 indicates expansion. HSBC’s index, released with Markit Economics, fell to an 11-month low of 50.1 in June from 51.6 in May.

The bigger decline in HSBC’s gauge was due mainly to the higher weighting of small and medium-sized companies, more affected by tight credit and labor and raw material costs, said Liu Li-gang, chief China economist at Australia & New Zealand Banking Group in Hong Kong.

Stocks Climb

The Shanghai Composite Index rose 0.4 percent to 2,772.68 at the 11:30 a.m. local-time break after declining 5.7 percent in the second quarter on concern that monetary tightening will threaten growth and profits.

The government-backed manufacturing index is based on a survey of purchasing managers in more than 820 companies in 20 industries. The report indicated that companies cut stocks of raw materials as domestic and overseas orders grew at a slower pace and output growth cooled.

The HSBC index, based on a survey of more than 400 companies, showed raw material purchases dropped in June, snapping 11 months of expansion, as output declined. New export orders contracted for the second month while input prices grew at the slowest pace in 11 months.

“Policy tightening is working, pointing to a peak of inflation in the coming months,” Qu Hongbin, chief China economist at HSBC said in a statement. “Despite the slowdown, industrial output is still growing by 12 percent to 13 percent year-on-year, which is consistent with GDP growth of around 9 percent.”

Weak Growth

Goldman Sachs Group Inc. said that while the official index may have been pulled down by a seasonal pattern of declines, it “suggests growth remained weak in June.”

China’s ruling Communist Party, which is celebrating its 90th anniversary today, says taming inflation is the top priority for this year. Premier Wen Jiabao said June 24 that he is confident of keeping prices under control, while Morgan Stanley says inflation may have peaked at an estimated 6.2 percent last month. That would be the biggest increase since 2008.

Manufacturing, which accounts for about half of China’s economy, is moderating as government policies curb demand for housing and cars, power shortages crimp output and monetary tightening limits company funding.


Containing Inflation

“Economic expansion is losing some steam after a period of aggressive tightening,” Chang Jian, a Hong Kong-based economist with Barclays Capital said before today’s release. “Slower growth is not bad as it can help contain inflation.”

BYD Co., the Chinese carmaker backed by Warren Buffett, this week reported a first-quarter profit decline of 84 percent as sales fell and financial expenses doubled because of increased borrowing and rising interest costs. The benchmark one-year lending rate is 6.31 percent compared with 5.31 percent a year ago and costs have also soared for companies borrowing outside the official banking system.

Economic growth may have slowed to 9.1 percent in the second quarter from a year earlier, Bank of China Ltd. estimates, compared with a 9.7 percent gain in January-through-March.

The government needs to sustain the expansion to create millions of jobs for workers migrating to cities from the countryside and to limit the risk of social instability. In May, industrial output growth slowed for a third straight month and passenger-car sales fell for the first time in more than two years. M2, the broadest measure of money supply, rose the least in almost three years.