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Manufacturing shrinks for 8th straight month
Published on: 2009-07-13
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April 1 (Bloomberg) -- China’s manufacturing shrank for an eighth straight month in March as collapsing global trade cut exports and growth across Asia.

The CLSA China Purchasing Managers’ Index dropped to a seasonally adjusted 44.8 from 45.1 in February, CLSA Asia- Pacific Markets said today in an e-mailed statement. A reading below 50 indicates a contraction.

Asian economies will expand this year at the slowest pace since 1998 as the global recession hurts trade and stimulus plans take time to revive growth, the Asian Development Bank said yesterday. President Hu Jintao today said China’s 4 trillion yuan ($585 billion) stimulus package has “begun to take effect,” giving the government confidence the economy can maintain steady and rapid growth.

“As we came out of last year, there was a big restocking process so growth lifted and now that’s beginning to fade,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong. “The next couple of months will be tricky but we’re on track for a recovery in the second half of the year.”

A worsening of domestic manufacturing orders was behind last month’s drop in the PMI, said Eric Fishwick, head of economic research at CLSA in Hong Kong.

The fall showed the danger of companies increasing orders for products in anticipation of, rather than in response to, government projects, he added. “Expect the production index to show softness in April,” Fishwick said.

‘Continuing Challenges’

The new-orders index fell to 43.6 from 44.2 after rising for three consecutive months. In contrast, the manufacturing index increased for a fourth month from a record low of 40.9 in November. An index of export orders rose to 41.4 in March from 39.5 in February.

“The PMI’s decline, following three monthly improvements in the index, illustrates the continuing challenges facing China’s manufacturing sector,” said Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong. “The country’s economic recovery is still in first gear.”

A measure of output gained to 44.3 from 43.9, according to today’s report. An employment index rose to 47.1 from 46.6, its second increase in eight months.

The PMI’s reversal suggests the government may further cut interest rates and the portion of deposits that banks must hold as reserves, said Cavey.

Interest Rates

“The government has been saying there are green shoots of recovery,” he said. “If the numbers start to fade we will see further monetary easing.”

Cavey expects the benchmark one-year lending rate to be cut a further 54 basis points in the first half of 2009 and for the bank reserve ratio “to come down more than interest rates.”

The lending rate is now 5.31 percent. The reserve ratio for the biggest banks stands at 15.5 percent and for smaller lenders it is 13.5 percent.

The PMI’s March decline was presaged by a plunge in steel prices in China since early February, said Fishwick. The price of hot-rolled steel in China fell 13.9 percent from its Feb. 4 high to 3,592 yuan per metric ton yesterday. Prices had surged 46 percent from a low of 2,850 yuan on Nov. 13 last year to its Feb. 4 high.

Buoyant private consumption and investment, and a pick up in credit growth, helped domestic demand offset the impact of China’s collapsing exports in the first two months of this year, the Organization for Economic Cooperation and Development said yesterday.

Stimulus Package

China’s economy is reacting positively to the government’s stimulus plan with investment spending this year “exceeding all expectations,” the ADB said yesterday.

Urban fixed-asset investment jumped 26.5 percent in the first two months from a year earlier, new bank lending quadrupled in February and vehicle sales rose 25 percent the same month.

A recovery for China’s economy in the second half remains on track because of higher investment, strong credit growth and a pick up in property transactions, said Cavey.

China’s 6.8 percent expansion in the fourth quarter from the same period a year earlier lagged behind its 9 percent growth for all of 2008 and 13 percent for 2007. Exports have dropped at a record pace, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.

Global Recession

Manufacturers in the U.S., Europe and Asia are struggling as the worst economic slump since World War II deepens, prompting the World Trade Organization to forecast a 9 percent plunge in global trade this year.

Plantronics Inc., a Santa Cruz, California-based maker of headsets and Altec Lansing speaker systems, said March 26 that it will cut 670 jobs, primarily in China, by moving production of Bluetooth headsets in the country to an existing supplier. The company will close its manufacturing site in Suzhou.

China’s exports may drop 10 percent in 2009, Zhang Yansheng, a researcher with the National Development and Reform Commission, said March 28. Imports may decline 5 percent, Zhang said. The PMI showed China’s exports falling at the slowest pace since October.

Chinese industrial companies’ profits dropped for the first time on record in the first two months of 2009 from a year earlier as the global recession cut demand for exports from the world’s third-largest economy.

Net income sank 37.3 percent in the first two months of 2009 from a year earlier to 219.1 billion yuan ($32 billion), the statistics bureau said March 27. Profits expanded 16.5 percent in the same period last year.

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