China Factory Activity Hits New Low

The country's purchasing managers' index, or PMI, has fallen to its lowest level in 11 months.

SHANGHAI — China’s manufacturing sector is continuing to weaken as factory activity in July fell to its lowest level in 11 months.


China’s purchasing managers’ index, or PMI, which measures manufacturing activity, fell to 47.7, down from 48.2 in June, according to preliminary figures HSBC released Wednesday. A reading below 50 indicates economic contraction.



HSBC said in its so-called flash PMI survey that factory output, new orders and employment all fell at faster rates while export orders decreased at a slower rate in July. The reading “suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking,” Qu Hongbin, HSBC chief economist for greater China, said in a statement.


The economist said that the weak manufacturing data means Beijing must “introduce additional fine-tuning measures to stabilize growth.”


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In June, HSBC cut its GDP forecast for China from 8.2 percent to 7.4 percent for 2013. In July, China announced GDP expanded to 7.5 percent for the second quarter compared to the same period last year. For the first half of 2013, GDP growth was at 7.6 percent, the weakest in three years.



China’s new administration has been steadfast in calls for reforms that would result in more sustainable, efficient growth rather than the breakneck expansion of the past. Officials have so far said that no stimulus would be injected into the economy amidst a flurry of data released in recent months indicating the world’s second largest economy is losing steam. Beijing is emphasizing the “quality of growth over quantity,” Qu said.

On July 21, the official Xinhua News Agency published a commentary that said the lowest GDP expansion rate that Beijing would tolerate before considering stimulus measures is 7 percent. The government has been working to eradicate inefficient lending, particularly to state-owned companies and local governments, which has resulted in trillions of dollars in debt.

Much of that lending has gone towards massive infrastructure projects, which enabled the country to maintain stable employment and enviable growth, particularly during the global financial crisis. On Tuesday, Beijing announced a five-year ban on government construction of new buildings, hotels and training centers, which could cause a further slump in economic expansion.  

Even with reforms focusing on more sustainability, China’s manufacturing sector may continue to face challenges.  A survey released by brokerage firm CLSA on Wednesday said labor costs in China are fast approaching parity with those of the United States and that if China cannot ramp up productivity, export-based manufacturing will no longer be one of the country’s main economic drivers. India, Thailand, the Philippines and Korea are becoming more attractive manufacturing centers when comparing labor costs versus productivity levels, CLSA said. “There have been substantial increases in Chinese manufacturing output per employee, but it has not been enough to match wage inflation,” the report said.  

China will become “unsustainably expensive very quickly” if its manufacturing sector cannot increase productivity in conjunction with an appreciating renminbi and increasing wages, CLSA said.