PMI fall points to economic growth slowdown

By Wang Bo (China Daily)
Updated: 2010-08-03 13:40
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BEIJING - China's slowing manufacturing activities indicate further deceleration in the country's economic growth in the months to come, but the short-term chances of policy relaxation are slim, economists said.

The official purchasing managers' index (PMI), a leading indicator of economic health released on Sunday by China Federation of Logistics and Purchasing, fell to 51.2 in July, the slowest pace in 17 months, marking a distinct turnaround from the strong performance at the beginning of the year.

The moderate PMI figure, in addition to the marked slowdown in China's gross domestic product growth, which dropped to 10.5 percent in the second quarter from 11.9 percent three months ago, is a clear sign that the economy is heading for a deeper slowdown.

Economists said the slowdown was largely the result of government curbs on the property sector and credit growth, which were initiated earlier this year to cool the overheated economy, and it is still not sufficient to prompt policymakers to change the current policy tone.

"We do not think the current environment will allow an immediate policy relaxation in response to the leading indicators, as there are still strong voices that the policy stimulus has been costly and property bubbles have yet to be deflated," said Ma Jun, chief China economist at Deutsche Bank.

He said it was possible that pro-growth voices might only begin to gain the upper hand in the country's policymaking process when China's GDP growth fell below 9 percent,

The People's Bank of China, the central bank, reiterated on Sunday in a statement posted on its website that there would be no change in the tightening measures for the real estate sector.

Zhang Liqun, a senior researcher at the Development Research Center of the State Council, said China's economic correction is still ongoing.

"Given the uncertain prospects for exports and investment growth, the pace of GDP growth is very likely to ease further," he said.

However, economists said although the government would not reverse its current property tightening measures, it remains determined to maintain solid growth.

At a high-level meeting on July 22, the country's top policymakers pledged to maintain the moderately loose monetary policy to maintain smooth and rapid growth.

"Maintaining relatively fast economic growth is the premise for achieving other objectives, meaning that policies to address structural issues and curb inflation would only be implemented up to a point," said Wang Tao, chief China economist at UBS Securities.

Wang said she expected more negative news on the economy in the months ahead.

China Daily