Chinese Manufacturing Slows Down

HONG KONG — The vast Chinese manufacturing sector appears to have contracted in July for the first time in a year, according to a survey released Thursday, adding to the mounting evidence that a series of official regulatory and policy measures is having the desired effect of cooling the red-hot Chinese economy.

The initial results of a closely watched survey of purchasing managers produced reading of 48.9 in July, the lowest level in 28 months — down from 50.1 in June, said HSBC, which published the index.

Readings below 50 represent contraction, so the slide below that level indicated that manufacturers had seen business slow markedly over the past few months, thanks to a combination of feeble global demand and tighter conditions at home.

For the past year and a half, policy makers have used a wide variety of tools to rein in booming growth and limit the rising prices that have accompanied it. Formerly free-flowing bank credits have become harder to obtain, for example, as banks were instructed to lend less.

Those measures have slowed the economy, but at a gradual pace that leaves room for still more tightening by Beijing in coming months, most analysts say.

The below-50 P.M.I. reading does not imply a “hard landing” for China, said Qu Hongbin, chief China economist at HSBC.

Industrial growth is likely to continue to decelerate in coming months as tightening measures filter through, Mr. Qu noted, but “resilient consumer spending and continued investment in ongoing mass infrastructure projects should support a G.D.P. growth rate of almost 9 percent for the rest of this year.”

The International Monetary Fund echoed that sentiment in its latest assessment of the Chinese economy
, published Thursday, noting that “China’s near-term growth prospects continue to be vigorous and are increasingly self-sustained, underpinned by structural adjustment.”

“Wage and employment increases have fueled consumption, the expansion in infrastructure and real estate construction has driven investment upward, and net exports are once again contributing positively to economic growth,” the fund said.

The I.M.F. projects 9.6 percent economic growth for China this year, and 9.5 percent expansion for 2012, in line with forecasts by many other economists. That is down from 10.3 percent last year, but well above what developed nations like the United States are managing.

But an aging population and gradually shrinking labor force risks fanning inflation in the longer term, the I.M.F. said, while low interest rates and a lack of places for savers to invest their cash mean there is a lingering risk of bubbles in the already hot property sector.

Those factors could lead to potential “significant risks” to financial and macroeconomic stability in China, the fund said, and it urged Beijing to address the challenges by raising interest rates further and allowing the renminbi to strengthen.

Beijing has so far relied heavily on so-called reserve requirement ratios for lenders as a policy tool. Successive increases in the ratio since early last year have gradually restricted the amount of money banks have been able to lend. Interest rate increases came into the policy mix relatively late: the central bank began nudging rates up again in October 2010.

“While the central bank’s monetary goals are the right ones, the means by which these targets are being achieved is moving in the wrong direction, relying on an increasingly complicated array of tools and administrative controls that will be difficult to effectively sustain,” the I.M.F. said in its report.

“The central bank should, instead, rely more on higher interest rates and open market operations.”

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