March 29, 2024

Manufacturing in China Grew Only Slightly in December

BEIJING — Big manufacturers in China narrowly avoided a contraction in December, a survey showed Sunday, but downward risks persist and suggest that the Chinese economy will need fresh policy support to counter a slowdown in growth.

The official purchasing managers’ index, which is compiled by the China Federation of Logistics and Purchasing on behalf of the National Bureau of Statistics, rose to 50.3 points in December from 49 in November.

That indicated a slight expansion in business activity in the vast Chinese factory sector, but the reading was barely above 50, which separates expansion from contraction.

The index fell below 50 points in November for the first time since early 2009.

Analysts had expected the official purchasing index to be at 49.1 in December.

“The rebound in the December P.M.I. shows that there will be no big slowdown in the Chinese economy,” Zhang Liqun, a researcher with the Development Research Center of the State Council, wrote in a statement accompanying the survey.

The economy faces downward pressure, but there are positive elements that could underpin growth, the researcher said.

The new orders index rose to 49.8 points in December, from 47.8 in November, while the index for new export orders rose to 48.6 from 45.6 in November.

A similar survey Friday by HSBC and Markit, a British data provider, which captures data from smaller factories, moved up to 48.7 points in December from a 32-month low of 47.7 in November.

But the HSBC-Markit survey, which captures data from smaller factories, signaled a modest contraction in activity on the month.

Despite the rise in the official survey, it is stuck near its weakest levels since early 2009.

Economists at Citibank said China was more likely to take policy steps to combat what the bank saw as a tangible slowing of economic activity.

“Accumulating evidence of economic weakness would herald more policy easing in the months ahead, starting with another” cut in reserve-ratio requirements by the Chinese New Year, which is on Jan. 23, Citibank said in a note to clients.

“Although domestic consumption held up steadily, its contribution may have been more than offset by weakened investment activity and deteriorating foreign trade conditions,” the note said.

China’s central bank is in the spotlight, with many analysts expecting that it will soon announce a cut in the required reserve ratio that it demands commercial lenders hold.

The central bank cut the reserve ratio by half a percentage point on Nov. 30 from a record high of 21.5 percent.

Cutting the ratio frees up funds that could be used for lending to support growth, but China’s leaders remain wary of relaxing their grip too soon on inflation.

The official survey showed that a significant drop in price pressures in November did not follow through to December.

The prices index of the official purchasing managers’ index rose to 47.1 from 44.4 in November.

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China Unexpectedly Reverses Economic Policy

The central bank said Wednesday that commercial banks would be allowed to keep a slightly lower percentage of their deposits as reserves at the central bank. The change, which will take effect on Monday, means that commercial banks will have more money available to lend, which could help to rekindle economic growth and a slumping real estate market.

Real estate developers, small businesses and other borrowers have been complaining strenuously in recent weeks of weakening sales and scarce credit. Prices have dropped up to 28 percent for new apartments in some Chinese cities this autumn, real estate brokers have been laying off thousands of agents as transactions have dried up, and export orders have slumped.

The Chinese move was a particular surprise because the central bank usually announces moves on Friday evenings, to allow banks and markets plenty of time to digest the news.

The Chinese announcement came after the Shanghai stock market had slumped 3.3 percent on Wednesday, its worst one-day loss in four months, on worries that the government might not act.

The reduction in the so-called reserve requirement ratio came after the central bank had increased the same ratio six times this year, and raised interest rates three times. The monetary policy moves earlier this year had been aimed at curbing inflation, which persists but appears to have been replaced by weakening economic growth as the top worry for policymakers.

Monetary policy changes are made not by the country’s central bank but by the State Council, the country’s cabinet. Shifts in the broad direction of policy are usually made only with the approval of the Standing Committee of the Politburo of the Chinese Communist Party – the nine men who really run China.

Analysts said that the central bank’s decision to announce a change in reserve requirements instead of quietly nudging state-controlled banks to make more loans showed an important political decision had been made.

“The public nature of this move – a move that would have gone through the State Council – is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation,” wrote Stephen Green, a China economist at Standard Chartered Bank, in a research note. “This is a big move, it signals China is now in loosening mode.”

The People’s Bank of China, the country’s central bank, cut the reserve requirement ratio by 0.5 percentage points as of Monday, to 21 percent for large banks and to 19 percent for smaller banks.

The Chinese move was such a surprise that one of the 15 members of the central bank’s monetary policy committee, Xia Bin, had just said at a seminar in Beijing on Wednesday morning that China would only “fine tune” its monetary policy and would maintain an overall stance that he characterized as “prudent.”

Those remarks triggered the slump in share prices during Wednesday’s trading in Shanghai; the stock market there had been closed for several hours by the time the central bank announced its policy reversal.

It was unclear if the Chinese move had been coordinated with the six central banks in the United States, Europe and Japan that agreed an hour later to provide more liquidity to world financial markets.

 

     The United States Treasury notifies the Chinese government of policy moves by the Obama administration, so as to reassure the United States government’s largest foreign creditor. But economists say that there has been little international coordination of monetary policy by China’s central bank.

    The People’s Bank of China is considerably more secretive than central banks in the West and particularly wary of foreign governments because of years of international pressure to allow faster appreciation of the renminbi, China’s currency.

 

     The Chinese central bank provided no explanation for its move on Thursday evening. The one-sentence statement only said, “The People’s Bank of China decided to cut financial institutions’ renminbi deposit reserve ratio by 0.5 percentage points.”

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