In the latest sign that the Chinese economy is slowing, a pair of surveys released on August 1 showed China’s factories struggled with their weakest activity in 28 months.
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China’s official purchasing managers’ index – a preview of business conditions in mostly large, state-run factories – fell two-tenths of a percent to 50.7 in July, as manufacturers grappled with credit shortages and softening global demand.
“I think China, like the rest of the world, is at cross roads, a very, very important point in the world’s development; and China is trying to go for a slower but more sustainable model of growth. So the slowdown is much as expected. It is quite moderate, but it is on track.”
A separate HSBC (NYSE: HBC) index that surveyed relatively smaller Chinese companies also found manufacturing activity shrank slightly for the first time in a year.
Cooling activity in the vast manufacturing sector of the world’s second-largest economy is re-igniting talk among market watchers that Beijing would be less forceful in tightening monetary policy in coming months to protect economic growth.
Since October, China’s government has raised interest rates five times and banks’ reserve ratio requirements nine times.
With China’s inflation hitting three-year highs of 6.4% in June, many analysts believe Beijing could raise interest rates once more this year.
The steady tightening of credit has left smaller companies starved of cash and choked off growth in certain quarters of the Chinese economy – although analysts still predict China’s growth engine would expand at least 9% this year.
Bottom line: China’s factory sector posts weakest in 28 months in July as manufacturers grappled with a credit shortage and softening global demand – the latest sign that the world’s second-biggest economy is slowing.