-A key measure of Chinese manufacturing activity posted its biggest monthly decline since March 2009, raising fears of a hard landing in the world's second-largest economy and increasing the chances that Beijing will be forced to turn to stimulus faster and more extensively than expected.
Growth in China's manufacturing sector has been slowing for several months, but Wednesday's reading is the first evidence of a shift from deceleration to contraction.
The preliminary HSBC China Manufacturing Purchasing Managers' Index, a gauge of nationwide manufacturing activity, fell sharply to 48 in November compared with a final reading of 51 in October. A figure below 50 indicates contraction.
Wednesday's data release is a preliminary reading on the HSBC PMI, reflecting 85% to 90% of the responses to the monthly survey of business managers. But a negative reading on the first data point for the month could ring alarm bells in Beijing, raising the prospect of a shift toward a pro-growth policy stance.
Moves to ease policy so far have been strictly targeted, including limited tax cuts for small business and efforts by the central bank to spur lending by easing some conditions in financial markets. Tim Condon, ING's chief economist for Asia, said that this latest evidence of a contraction in growth could help push the government from fine-tuning policy to outright easing.
Wednesday's PMI data jibes with a recent spate of negative data points and corporate reports. Sales of residential real estate dipped 11.6% year-on-year in October—a leading indicator that property investment and demand for construction materials are set to fade.
A salesman at Beijing Lima Cement Co. interviewed on Wednesday said times were tough: "Of course it's bad, and that has lot to do with real estate—there is much less construction going on" he said.
Fading growth in Europe and a weak recovery in the U.S. mean exporters are also taking a beating. China's exports have fallen for three consecutive months.
The manager of a textile company in China's central Anhui province, who gave his surname as Zhang, said that a 50% fall in orders compared with 2010 had contributed to a sharp reduction in output and employment. "We used have over 1,000 workers a few years ago, but now we only have about 250. The current operating rate is less than 30%" of capacity, the manager said.
Low value-added exporters—like those in the textile sector—have been squeezed hardest by rising wages and an appreciating currency. But fading foreign demand means China's high-tech firms are also under pressure.
On Tuesday, Wuxi-based solar-equipment maker Suntech Power Holdings Co. cited weakness in Europe as one of the reasons for a third-quarter loss of $116 million—a turnaround from profit of $33 million in the same period last year—and plans to slash capital expenditure.
The World Bank on Tuesday forecast that China's gross domestic product growth this year would decline to 9.1% from 10.4% in 2010, and further to 8.4% in 2012. But a double whammy of weak investment at home and fading demand abroad raises the prospect of a sharper-than-expected slowdown. Isaac Meng, a Hong Kong-based portfolio manager for Pacific Investment Management Co., the world's biggest bond fund, said at the end of October that he expected China's growth to slow to just 7% in 2012.
Fading inflation, with the consumer-price index falling to 5.5% year-to-year in October from 6.1% in September, opens up space for a more relaxed monetary policy. Reducing the amount banks have to hold on reserve and freeing up funds for lending is one option. "The government is likely to cut the reserve requirement before the end of the year and certainly before Chinese New Year" said Stephen Green, China economist at Standard Chartered. Chinese New Year falls at the end of January.
But few analysts expect a repeat of the shock-and-awe stimulus China's policy makers rolled out in response to the 2008 global financial crisis, when banks more than doubled lending to 9.6 trillion yuan ($1.5 trillion) in 2009 to support growth. Bills from that lending surge are now falling due. The government is grappling with a real-estate bubble that is only beginning to deflate; inflation remains outside Beijing's comfort zone; and banks face the prospect of loans to local government infrastructure projects turning bad. Those problems mean Beijing's scope to support growth is more limited.
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