Chinese economy in trouble as manufacturing slows down

The Chinese economy is headed for troubled waters, with its manufacturing sector shrinking in November for the first time in nearly three years, in a fresh sign of a further economic slowdown that may prompt it to loosen its monetary policy.

The purchasing managers' index (PMI), a gauge of manufacturing activity, tumbled to 49 from 50.4 in October, according to the China Federation of Logistics and Purchasing.

A PMI under 50 indicates a contraction of manufacturing activity, a situation that hasn't been seen in China since February, 2009.

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The sub-index for export orders fell sharply to 45.6 in November from 48.6 in October, indicating that the spreading euro zone debt crisis and weakened demand from the United

States were hurting growth in the world's second-largest economy. Some analysts said a lull in China's property market also contributed to the economic slowdown, with both prices and sales dropping significantly following the last round of credit tightening.

"It reinforces our view that China's economy will fall sharply in the months ahead as the property sector has reached a tipping point," Zhang Zhiwei, an economist with Nomura Securities, said.

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The risk of a sharp deterioration of GDP growth in the first quarter next year is rising significantly, he told state-run China Daily today.

The poor PMI data released on Thursday came one day after the Chinese government slashed the reserve ratio for the country's commercial lenders to improve money supply.

"The message is clear: the economy is slowing much faster than expected and the government has stepped into the ring. The loosening campaign has begun," Alistair Thornton, an analyst with IHS Global Insight, was quoted as saying by the China Daily.

Analysts now expect the government to resort to greater loosening.

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"Judging from the PMI, China is experiencing the most difficult time since the global financial crisis in 2008 and this demands the Chinese government further loosen its policies," said Liu Ligang, the director of the economic research department of ANZ Banking Group.

But Cai Jin, Deputy Director of the China Federation of Logistics and Purchasing, said the pace of the economic slowdown will remain steady and the chance of a great fluctuation is slim.

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Zhang Liqun, a researcher with the Development Research Centre of the State Council, also said the relatively strong momentum of domestic investment and consumption will help stave off a plunge.

The Chinese stock market rallied on Thursday after the central bank cut of the reserve ratio, but it fell flat toward closing, indicating that market confidence remains fragile, market watchers said.

Economists expect that the central bank's move is the beginning of a slew of loosening policies, which may help ease the financing difficulties of the country's cash-strapped small businesses.

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The country's central bank has raised the reserve ratio for banks 12 times since January, 2010, taking it to a record high of 21.5 per cent in its last hike.

Although the tightening stance helps ease consumer prices, it also leads to increasing complaints about credit strains from the country's businesses, especially small enterprises.

Analysts said the poor PMI figures will prompt policymakers to shift the focus from taming inflation to stabilising growth.

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"It (the central bank move) is a clear signal that Beijing now sees the balance of risks as lying with growth rather than inflation," said Stephen Green, an economist with Standard Chartered Bank.

He added that the lending quota for Chinese banks will be expanded.

Vice-Minister of Finance Zhu Guangyao said at a conference in Beijing on Thursday that uncertainties and unstable factors in the world economy are challenging China's effort to maintain steady and relatively fast growth.

"We must make policies more focused, flexible and preemptive and manage the pace and strength of macroeconomic controls," he said.

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Economists predict that one more reserve ratio cut is possible in December or January, while interest rates are likely to remain at the current level in the first quarter of 2012.

However, some experts said China will not turn about its monetary policy dramatically.

Cao Yuanzheng, the chief economist of Bank of China, said inflation remains the top risk in the Chinese economy and a too hasty loosening will not help stabilise growth.

The country's GDP growth slowed to 9.1 per cent in the third quarter of the year from 9.5 per cent in the second quarter and 9.7 per cent in the first.