Interpac Business and Migration Solutions Melbourne Australia

(December 2, 2011)

BEIJING / SHANGHAI - China's manufacturing sector shrank in November for the first time innearly three years, a fresh sign of a further economic slowdown that analysts say may promptthe country to loosen monetary policies.

The purchasing managers' index (PMI), a main gauge of manufacturing activity, tumbled to 49from 50.4 in October, according to the China Federation of Logistics and Purchasing.

A PMI under 50 indicates a contraction of manufacturing activity - a situation that hasn't beenseen since February 2009.

The sub-index for export orders fell sharply to 45.6 in November from October's 48.6,suggesting that the spreading eurozone debt crisis and weakened demand from the UnitedStates were wearing down growth in the world's second-largest economy.

Some analysts said a lull in China's property market also contributed to the economic slowdownwith both prices and sales dropping significantly under the previous round of credit tightening.

"It reinforces our view that China's economy will fall sharply in the months ahead as theproperty sector has reached a tipping point," said Zhang Zhiwei, an economist with NomuraSecurities.

Zhang said that the risk of a sharp deterioration of GDP growth in the first quarter of next yearis rising significantly.

The poor PMI data, released on Thursday, came one day after a cut in the reserve ratio for thecountry's commercial lenders.

"The message is clear: the economy is slowing much faster than expected and the governmenthas stepped into the ring. The loosening campaign has begun," Alistair Thornton, an analystwith IHS Global Insight, wrote in a research note.

Analysts now expect the government to resort to greater loosening.

"Judging from the PMI, China is experiencing the most difficult time since the global financialcrisis in 2008 and this demands the Chinese government further loosen its policies," said LiuLigang, director of the economic research department of ANZ Banking Group.

But Cai Jin, deputy director of the China Federation of Logistics and Purchasing, said the paceof the economic slowdown will remain steady and the chance for a great fluctuation is slim.

Zhang Liqun, a researcher with the Development Research Center of the State Council, alsosaid the relatively strong momentum of domestic investment and consumption will help stave offa plunge.

The Chinese stock market on Thursday rallied on the central bank's cut of the reserve ratio butit fell flat toward closing, indicating that market confidence remains fragile, market watcherssaid.

Economists expect that the central bank's move is the beginning of a slew of loosening policies,which may help ease the financing difficulties of the country's cash-strapped small businesses.

The country's central bank had raised the reserve ratio for banks 12 times since January 2010,bringing it to a record high of 21.5 percent.

Although the tightening stance helps ease consumer prices, it also leads to increasingcomplaints about credit strains from the country's businesses, especially from smallenterprises.

Analysts said that poor PMI figures will prompt policymakers to shift the focus from taminginflation to stabilizing growth.

"It (the central bank move) is a clear signal that Beijing now sees the balance of risks as lyingwith growth rather than inflation," said Stephen Green, an economist with Standard CharteredBank.

He added that the lending quota for Chinese banks will be expanded.

Vice-Minister of Finance Zhu Guangyao said at a conference in Beijing on Thursday thatuncertainties and unstable factors in the world economy are challenging China's effort tomaintain steady and relatively fast growth.

"We must make policies more focused, flexible and pre-emptive and manage the pace andstrength of macroeconomic controls," he said.

Economists predict that one more reserve ratio cut is possible in December or January whileinterest rates are likely to remain at the current level in the first quarter of 2012.

However, some experts said China will not turn about its monetary policy dramatically.

Cao Yuanzheng, chief economist of Bank of China, said inflation remains the top risk in theChinese economy and a too hasty loosening will not help stabilize growth.

The country's GDP growth slowed to 9.1 percent in the third quarter of the year, from 9.5percent in the second quarter and 9.7 percent in the first.

Source from Chinadaily.com