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China manufacturing slows: omen for weaker growth

China manufacturing slows: omen for weaker growth

July 1st, 2011 by ELAINE KURTENBACH, AP Business Writer in News

SHANGHAI (AP) - Chinese manufacturing slipped to its slowest pace in 28 months in June, sapped by inflation-fighting curbs on credit and weaker overseas demand, according to surveys released Friday.

The China Federation of Logistics and Purchasing said its monthly purchasing managers index fell to 50.9 in June from 52 in May, 52.9 in April and 53.4 in March. The index has remained above 50, the benchmark for expansion, for 26 straight months.

The report said the trend likely augurs a further slowdown in growth brought on by inflation-fighting curbs on credit.

London-based HSBC said its survey of 400 companies, which is adjusted for seasonal factors, signaled a decline in manufacturing production for the first time since July 2010, though the pace of decline was marginal.

The HSBC index slipped to 50.1 in June from 51.6 in May, with the slowest increase in new orders in 11 months, it said, attributing the weakness to subdued global demand. But input cost increases also slowed, reducing inflationary pressures.

The reading for June "implies that policy tightening is working, pointing to a peak of inflation in the coming months," Hongbin Qu, chief economist and head of Asian Economic Research at HSBC, said in a statement.

The government-affiliated Federation of Logistics and Purchasing said its survey showed declines were greatest in the production, new orders, purchasing volume and prices for raw materials indices. The survey also showed a contraction in production of chemicals, textiles, and transportation equipment. Imports and new export orders also slowed.

The survey "indicates that future economic growth may continue to decrease," federation analyst Zhang Liqun said. But he said the results of the survey did not suggest China would face a "deeper correction."

Driven by double-digit surges in food costs, inflation rose to a 34-month high of 5.5 percent in May. After months of forecasting it would moderate by midyear, China is expected to announce inflation in June surged above 6 percent.

Many inside China expect authorities to raise key interest rates sometime soon, in a fifth hike since October, to counter surging costs. Beijing has repeatedly ordered state-owned banks to boost their reserves, aiming to curb excess credit.