China’s Factories Improve

Published Wed, Feb 1st, 2012   Wall Street Daily Research

China’s factory activity cranked up a notch in January after a slight expansion in December – all good news for a soft landing for the world’s second-biggest economy.

The official Purchasing Managers’ Index (PMI) inched up to 50.5 last month, comfortably above 50, the level that marks an expanding economy.

New orders and purchases improved, but new export orders shrank further, reflecting slowing global demand for Chinese goods.

Nevertheless, China’s factories are operating at their weakest levels in three years. And economists say this means Beijing’s pro-growth policies will likely stay in place for the coming months.

Baring’s Khiem Do, Baring Asset Management’s Head of Asian Multi-Asset, says anyone hoping for aggressive easing will be disappointed:

“You have a situation where growth is slowing down and inflation is also slowing down. So we think that from the government’s viewpoint, I think that they’re quite happy with that, because this is exactly what they want to achieve. So I don’t think they’re in any hurry to ease monetary policy. If the market is hoping for an aggressive cut in the triple-R over the next few months, I think they’ll be disappointed.”

JPMorgan’s Asset Management’s Head of Sovereign and Institutional Strategy, Andrew Economos, says China’s central bank has several tools, including relaxing bank reserve ratios, that it can use to ward off a slowdown – but a rate cut is unlikely:

“They will be slow in cutting rates, only because they’re still very much concerned about credit growth, A, and B, property prices, which are still a little bit too high. So the PBOC is engaged in this very fine-tuning of trying to bring down property prices and credit growth, while still maintaining economic expansion and not disappoint. Tough, tough stuff.”

China’s central bank cut bank reserve requirements for the first time in three years last November.

And with the economy growing at its weakest pace in two-and-a-half years in the latest quarter, further cuts are expected in the coming months.