China PMI slips to 8-month low

Last Updated: Thu, Aug 02, 2012 04:49 hrs

China's economy continued to show signs of slowing Wednesday after a key measure of the nation's economic growth weakened.

China's official factory purchasing managers' index slipped to 50.1 points in July, a slight drop from 50.2 points in June but also the lowest figure in eight months, according to the National Bureau of Statistics.

The figures show that while factory output is growing slightly, new orders and exports are declining (a reading above 50 points indicates growth; below 50 signals contraction).

In an economic report issued early Wednesday, analysts at IHS Global Insight said, "This is not the bump the authorities are looking for."

Concerned over the stagnating economy - the world's second largest after the United States - China's leaders have moved in recent weeks to shore up growth with policy easing measures and increasingly strident rhetoric.

The government has cut interest rates twice over the past two months and announced a series of bold spending packages aimed at reviving construction and government projects, such as the nation's high-speed rail system.

Beijing has also allowed its currency, the renminbi, to weaken against the dollar in recent months, in what seems like an effort to aid struggling exporters. However, that has not helped exports to Europe, as the renminbi has not weakened against the euro and demand on the Continent remains soft.

Beijing is also supporting new local government spending proposals, pushing the state sector back into a role it played after the onset of the 2008 global financial crisis.

Back then, a massive, government-backed economic stimulus package fueled a surge in state construction projects and buoyed the Chinese economy. But a year into the recovery that followed, there were growing concerns among state officials and economists that China had spent too aggressively, and may have damaged its long term prospects by encouraging a huge buildup in local government debt and fueling a property bubble.

Now, even with worries that China's banks may have been damaged by that lending spree, the government seems to be returning again to the surest way to spur growth: pump up government spending.

As the country prepares for a once-in-a-decade leadership transition in Beijing, President Hu Jintao and Prime Minister Wen Jiabao - who are both expected to step down - have become more vocal in their support of government spending initiatives.

Analysts, though, have warned that such efforts could aggravate long-standing imbalances in the economy.

But in a nation where government spending is the leading driver of growth, policy makers seem to think there is no other option. In recent months, China's industrial profits have slipped and capital has been flowing out of the country, putting greater pressure on local governments and the banking sector. And while property prices have begun to rebound, that seems unlikely to revive growth or stabilise the labor market.

Factories in the biggest export zones have begun laying off workers. Also on Wednesday, in a separate measure of manufacturing activity, a purchasing managers' index published by HSBC showed that while overall July output increased slightly from June, new manufacturing orders had declined.

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