China manufacturing weakens further

China manufacturing weakens further: HSBC
By Chris Oliver | MarketWatch
Jun 21, 2012

Reuters Employees process radiator components at a factory in Suining, China.
HONG KONG (MarketWatch) — China’s manufacturing activity deteriorated in June, according to preliminary HSBC data released Thursday that registered a seven-month low, indicating that global problems have taken a mounting toll on China’s export-dependent industries.
The inital, or “flash,” version of the manufacturing Purchasing Managers Index dropped to 48.1 for
the month on a 100-point scale, compared with a final reading of 48.4 for May, HSBC said.
A reading below 50 indicates a weakening in business conditions at factories, while one above 50 showing improvement.
HSBC chief China economist Hongbin Qu said the data suggested exports are likely to weaken further in coming months. He also flagged employment as the next economic pillar that could be weakened by the faltering global economy, saying subindexes showing a sharp fall in prices and a moderation in new orders suggested weak demand at home in China.
In a statement accompanying the flash PMI results, Qu said overall conditions in June had “continued to slow,” matching language used in May, and switching from HSBC comments as recently as April that China’s “slowdown [had] stabilized.”
Societe Generale analysts said the preliminary PMI reading for June places China on track for an eighth straight month of levels indicating contraction, matching the slump that lasted between August 2008 and March 2009 as the longest on record.
SocGen economist Yao Wei said PMIs for the next two months would likely also signal contraction, making this the longest-ever slump, although she acknowledged the severity was shallower in comparison with that of the global-crisis era.
“We see little probability of this series moving back into the expansion zone in the next two months, as small and medium-sized enterprises tend to lag in the recovery,” Yao said.
Deutsche Bank analysts noted that the new-orders subindex had sunk to its lowest level in three years.
In spite of the weakness, Deutsche Bank economist Jun Ma said he was upbeat on the outlook through the end of the year, noting that Beijing is slated to take a more activist approach in backstopping growth. He pointed to a central-government directive informing banks to relax restrictions on lending to infrastructure projects such as railways and airports, reported Wednesday, as among upbeat signs.
“The government has stepped up its efforts to boost the economy,” Ma said.
Meanwhile, subindexes in the PMI survey supported the view of a structural slowdown as output, new orders and new export orders showed contraction at a faster rate.
Backlogs of work fell, reversing from an expansion in the May survey, while employment measures offered up a slightly less negative view, registering a contraction but at a softer pace than in the prior month.
In a sign that deflation is gathering pace, both input and output prices declined again, with the rate of the drop accelerating from levels in May.
Hong Kong stocks, which were lower ahead of the flash PMI result, came under accelerated downside pressure following the result, with the Hang Seng Index (^HSI) ending down 1.3%.
Mainland Chinese stock indexes were knocked for a bigger loss, with the Shanghai Composite Index (000001.SS) and the Shenzhen Composite Index both ending 1.4% lower. The mainland markets were due to close Friday for a holiday.