China’s Manufacturing Growth Weakens As New Orders Drop

China’s manufacturing expanded at the weakest pace in seven months as overseas orders dropped, and South Korea cut its estimate for export growth this year, underscoring risks to Asian economies from Europe’s debt crisis.

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. South Korea’s Ministry of Knowledge Economy lowered its projection for overseas sales to an increase of 3.5 percent from 6.7 percent, citing a slowdown in major economies.

Manufacturing data from China, the world’s biggest exporter, signal the government may need to add stimulus to arrest an economic slowdown that probably extended into a sixth quarter. The downturn is rippling through Asian nations, with South Korea’s sales to China, its biggest market, stalling in the first 20 days of June.

“It’s clear the slowdown of export growth as a result of weakness in Europe and the U.S. continues to weigh on the Chinese economy,” said Lu Ting, head of greater China economics at Bank of America Corp. in Hong Kong. The weaker PMI reading “will likely push policy makers to introduce incremental measures such as reserve-ratio cuts and easing lending restrictions to stabilize growth,” he said.

Asian stocks and currencies strengthened last week as European leaders agreed on measures to try to ease the region’s debt crisis. The Bloomberg-JPMorgan Asia Dollar Index rose 0.8 percent and the MSCI Asia Pacific Index advanced 2.7 percent.

Yuan Declines

Gains in China’s currency against the U.S. dollar have stalled as growth in Asia’s biggest economy slowed and Europe’s austerity curbed demand for exports. The yuan weakened 0.88 percent in the second quarter, its biggest quarterly decline since a dollar peg ended in 2005.

Elsewhere in Asia today, the Bank of Japan’s second-quarter Tankan index for the nation’s large manufacturers will be unchanged from minus 4 in the first quarter, according to the median estimate of 19 analysts surveyed by Bloomberg.

The European Union’s statistics office will say unemployment in the 17-nation euro area rose to 11.1 percent in May, according to the median estimate in a Bloomberg News survey. The jobless rate was 11 percent in March and April, the highest on record.

In the U.S., manufacturing probably grew at a slower pace in June, with the Institute of Supply Management’s factory index showing a decline to 52.0, the lowest level in eight months, according to economists surveyed by Bloomberg.

Monetary Easing

The June reading for China’s official PMI, based on responses from 820 companies in 31 industries, compared with the 49.9 median estimate of 24 economists surveyed by Bloomberg News. The dividing line between expansion and contraction is 50.

A separate purchasing managers’ index released by HSBC Holdings Plc and Markit Economicsindicated manufacturing may have contracted for an eighth month in June, according to a preliminary report on June 21. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due today.

While yesterday’s PMI reading was “slightly better than consensus, the underlying trend still indicates a deterioration in economic activity,” said Shen Jianguang, Hong Kong-based chief Asia economist for Mizuho Securities Asia Ltd. “Further monetary easing is warranted, with two interest-rate cuts and reserve ratio cuts in the second half increasingly likely.”

Deteriorating Growth

The People’s Bank of China lowered interest rates last month for the first time in more than three years and reduced the amount of cash banks must set aside as reserves three times starting in November. The ratio stands at 20 percent for the biggest banks after the last cut in May.

Shen estimates economic growth slid to 7.2 percent in the second quarter from a year earlier while Bank of America’s Lu forecasts 7.5 percent. Gross domestic product expanded 8.1 percent in the first three months of the year, the fifth quarterly slowdown and the slowest pace in almost three years.

The gauge of export orders in the federation’s index contracted for the first time since January. HSBC’s preliminary report showed new export orders had their largest decline since March 2009.

“Tumbling export orders point to headwinds to exports in the third quarter, suggesting domestic demand needs to pick up to stabilize growth,” Chang Jian, a Hong Kong-based economist atBarclays Capital, said yesterday.

South Korea’s exports rose 1.3 percent in June from a year earlier, the Ministry of Knowledge Economy said yesterday. That compared with the 0.5 percent median estimate in a Bloomberg News survey of 16 analysts and an 11.1 percent increase a year earlier. Shipments to the European Union fell 22.7 percent from a year earlier in the first 20 days of June and sales to China were little changed, the data showed.

Taurus Investment & Securities Co. said on June 25 it reduced its estimate for second-quarter operating profit at Samsung Electronics Co., the world’s biggest maker of computer memory chips and flat screens. Taurus cut its forecast to 6.9 trillion won ($6 billion) from 7.2 trillion won, citing weaker- than-expected demand for products such as televisions.

(Curtsey : Bloomberg)

Rupesh Yatesh Dalal
Head Research Department

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