China's factories falter, pro-growth policies eyed

BEIJING: China's factory activity shrank again December as demand at home and abroad slackened, a purchasing managers' survey showed on Friday, reinforcing the case for pro-growth policies to underpin the world's second-largest economy.

The People's Bank of China is widely expected to lower its requirement for the amount of cash banks must hold as reserves to let lenders inject more credit into the economy to fight headwinds from Europe's debt crisis and sluggish U.S. demand.

The HSBC Purchasing Manager's Index, designed to preview the state of Chinese industry before official output data are published, inched up to 48.7 in December from a 32-month low of 47.7 in November, but fell short of the flash reading of 49.

The HSBC PMI has been mostly under 50, which demarcates expansion from contraction, since July.

"While the pace of slowdown is stabilising somewhat, weakening external demand is starting to bite," said Qu Hongbin, China economist at HSBC.

"This, plus ongoing property market corrections, adds to calls for more aggressive action on fiscal and monetary fronts to stabilise growth and jobs, especially with prices easing rapidly."

He said China would avoid a hard economic landing so long as policy easing measures filtered through in coming months.

HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13 percent in industrial output.

China's once turbo-charged economy is on track to slow for a fourth successive quarter, easing further from the first quarter's 9.7 percent annual growth rate with economists expecting the final three months of the year to have slipped below 9 percent.

The official PMI, due to be published on Sunday, is expected to paint a similar picture, suggesting the world's second-largest economy is finishing 2011 on a weak note, in tandem with the global economic outlook.

Both the official and HSBC PMIs are stuck near their weakest levels since early 2009, when China took a blow from the global financial crisis.

Economists polled by Reuters earlier this month forecast the PBOC will deliver 200 bps of required reserve ratio (RRR.L) cuts by the end of 2012 but refrain from an outright cut in interest rates unless quarterly GDP growth dips below 8 percent.

Economists typically view growth of 7 to 8 percent as the bare minimum needed to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social harmony.

"I think the government will ratchet up pro-growth policies if (quarterly) growth falls below 8 percent, otherwise the economy could face big risks," said Guotai Junan Securities economist Wang Hu in Shanghai.

"Another RRR cut could happen any time."

China's central bank cut reserve requirements for commercial lenders late in November for the first time in three years.

The RRR remains at 21 percent for big banks, giving the central bank plenty of room to cut and free up funds that could be used for lending.

Persistent capital outflows from China are putting more pressure on the central bank to release cash to keep credit conditions supportive for growth.

Underlying indexes of the HSBC PMI showed softening demand at home and abroad, which helped cool inflation -- a boon for Chinese policymakers, according to the data collated by UK-based information firm, Markit.

The sub-index for overall new orders edged up to 46.9 in December from November's 45, but still signalled falling demand. New export orders shrank in a reflection of listless demand from the United States and Europe -- China's top overseas markets.

Average input costs faced by manufacturers continued to moderate as raw material prices slipped, the HSBC survey showed.

Inflation appears to be cooling, having fallen from a three-year high of 6.5 percent in July to 4.2 percent in November, creating additional room for policy easing to support growth.

HSBC's Qu expects the government to move on the fiscal front to boost job creation, cutting taxes for exporters -- a sector employing more than 30 million workers -- while increasing spending on public housing and other projects.

" On top of monetary easing, mainly in the form of further reserve ratio cuts, we have long argued that fiscal policy can and should play a more important role in stabilise growth and jobs ," Qu said.

http://m.timesofindia.com/PDATOI/art...w/11306701.cms

I am sure they will find an ingenuous way as they find for all issues.

First expect a denial of anything like this happening.

In every economics course I ever took a PMI under 50 means contraction, but in China that means insane growth.

That is due to rising productivity from the original lower level. For example, the textile industry's productivity has increased due to introduction of domestic manufactured automated machine(cost aroung 200,000 rmb). The machine used to cost 500,000 rmb when it need to be import from Japan or Germany. In my family business's factory, one skilled worker can operate about 5 or more machine, and the machine work faster and produce more consistent quality. This is a sign of danger by replacing manufacturing job, but rising productivity is always a good thing.

Another thing is the factories sometime may delay expansion to clear inventories.

Chinese textile can compare in quality and cost with the Bangladeshi and Pakistani textiles?

The bath towels I bought from Pakistan have lasted for years, very good quality. The ones I bought in China unraveled in the wash within a couple months.

That is due to importer does not demand for higher quality. When you only willing to pay no more than $5, quality goes down. When you are willing to pay for higher cost, quality goes up. Don't you know much of Coach's product is actually made in China? China in the next few year will continue to loose shares in lower end textile market, that is just the natural of the business. Some of factories owner we know have shift their production to Vietnam and Cambodia. In Cambodia, wage is at about 60 usd a month... China will continue to loose textile jobs to those countries and also machines. The shift have gain momentum, but since those country have limited industry base, it will took years for them to replace China as centers of textile manufacturing. For instance, Bangladesh textiles industry have been booming, but they struggle to filled all the demand. Power outage is also more common in those country. To ensure shipment, importer have to order months ahead...

Again, China will gradually loose market, but it will take years. Other countries will not be able to exponentially grow their output overnight.

how dare you expect quality products from China?? their job is to only maufacture, ifact I believe, most of their labourers are so skilled that they do their work without even looking at them, thus the great MADE IN CHINA although available everywhere has a unique quality

Well, another reason for deteriorated quality is most factories offers a base wage plus wage for every product they manufacture. The base wage is about 200 usd or more, the average $300-400 salaries come from rewards of productivity. So there is a tendency for labors to do the work as quick as possible, quality therefore suffer. Larger factory usually have QC team that check the product at end to prevent workers from degrading quality of the products. Bigger Chains such as Gap, A&F and American Eagle Outfitter etc, will assign designated QC company to checked the products at the end in Factories expense, those companies charge about 2-5 rmb per product. That is why made China quality is different when you buy it from bigger brands.

I assume the wage system is the same in Bangladesh or Vietnam too, without this system, productivity goes way down. Other factory owners I know uses the same system in Vietnam.

Another thing worth mentioning, according to Boston Consulting Group's report Made in America, Again, "Although China accounted for 19.8 percent of Global manufacturing value added in 2010, the U.S. still accounted for 19.4 percent-a share that has decline only slightly over the past three decades."

The report also mentions that the annual increase of 10% productivity in China cannot compensate the pace of wage increases. See exhibit B in the report. I post a link of the report below, it is actually a very interesting research report. Search the word productivity in the PDF document, you will find the data I mentioned. This PDF does not allow copy and paste, so apparently they do not want me to copy and paste passages. So I will not copy the passage and reposted here.

You can read it yourself, very interesting article that indicate China is losing competitive advantage in manufacturing sectors.

http://www.bcg.com/documents/file84471.pdf