China: slight contraction in manufacturing activity

Manufacturing activity in China fell slightly in February, according to a provisional index released Wednesday by the bank HSBC, which believes that the risks to growth in the second world economy have strengthened. The PMI purchasing managers settled temporarily at 49.7, against 48.8 in January. It is the smallest contraction in industrial activity in China in four months. An index reading above 50 indicates expansion, and a figure below this threshold contraction. “Growth remains on a downward trend, despite a slight improvement in the PMI associated with a strong production recovery after the Chinese New Year,” which this year fell on January 23, Qu Hongbin commented, chief economist of the bank for China. “No significant rebound in domestic demand is in sight, the weaknesses are more pronounced outside, reinforcing the downward pressure on growth,” said Qu, while HSBC reported a drop in new industrial orders, including for export. HSBC believes that this situation should prompt the central bank to continue easing monetary policy. “The People’s Bank of China (PBOC), after conducting the first rate cut in bank reserve requirements this year, should step while easing inflationary pressure continues to decline,” according to Qu. China’s central bank announced Saturday a decrease, as of February 24, half a percentage point of the reserve ratio which determines the amount of money that commercial banks can lend. Lower reserve requirements that are more than two times higher in China than in Europe, allows banks to lend more, thereby supporting economic activity. Growth of the Chinese economy grew by 9.7% yoy in the first quarter 2011 to 8.9% in the fourth quarter. On November 30, the central bank announced the first decline in reserve ratios of banks in almost three years, signaling the end of a cycle of monetary contraction began in fall 2010 to fight against inflation. HSBC will publish its final index for February on March 1.

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