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Slumping purchasing index adds to China fears

A worker operates on a picture and mirror frame assembly line at a factory in Zibo, Shandong Province May 28, 2012.


Another day, another worrying sign from the world's second-largest economy. China's official purchasing managers index has fallen to its lowest level so far this year, a number expected to spur calls for more government moves to shore up the country's slowing economy.

The official PMI for May, as released by the National Bureau of Statistics, sits at 50.4 per cent, still slightly in expansion territory though down from last month's 13-month high of 53.3. A rival private calculation done by HSBC, more heavily weighted toward smaller private firms, is also down month-on-month, to 48.4 from last month's 49.3.

"The short-term moderation of economic growth at present does not mean the Chinese economy is entering a new recession stage," a statement from the China Federation of Logistics and Purchasing, which compiles the official index, said yesterday.

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But increasing the worry, HSBC economists wrote, is that there could be more to come given risks from falling exports and the leftover impact of Beijing's tightening, particularly in the property market, last year.

"May's weaker growth data … reinforces the case for more decisive easing actions. Beijing policy makers have proved their ability to reflate when necessary. Fears about a sharp growth slowdown are overplayed. We are confident that they will get on [with]their job with supporting growth, now the top policy priority," wrote Qu Hongbin and Sun Junwei, China economists at HSBC.

That the two indices are completely opposing – one reflecting slow growth, the other slow contraction – explains in part the radically different opinions on the state of China's economy at the moment. China-boosters maintain the country's economy is still likely to grow at or near 8 per cent this year, a perfectly respectable number, while those more pessimistic warn present economic trends reflect a deeper and more worrying structural dysfunction.

"There is more than the usual amount of disagreement about China's economic prospects at the moment, with a notable split between those focusing on a top-down macro picture that doesn't look too bad, and those who highlight admittedly ugly reports of small businesses shutting down and borrowers scrambling for cash," wrote Andrew Batson, research director at GK Dragonomics, who maintains some of the present slowdown may be a symptom of China's manufacturing industry maturing away from low-cost, high-energy production toward less labour-intensive, higher-value goods.

"This backdrop of structural change is the key reason why we are cautious about extrapolating from reports of the pain and suffering of individual companies or sectors to an argument that the whole economy is in a tailspin. Their micro pain could well be a sign of a generally healthy macro adjustment. In an economy that is changing as rapidly as China's, the winners of the past decade will probably not be the winners of the next decade," he wrote.

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