China's economy will not suffer sharp slowdown

08:16, July 07, 2011      

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China's Purchasing Managers' Index dropped to nearly 51 percent in June, down 1.1 percentage points from the previous month. The index was lower than the market expectation of nearly 52 percent and was at its lowest level since February 2009, according to statistics released by the National Bureau of Statistics and China Federation of Logistics and Purchasing on July 1.

The country's Purchasing Managers' Index continued to stay above the boom-or-bust threshold of 50 percent in June, reflecting that its economy was still growing steadily, though at a slower pace. Industry insiders said that after inflationary pressures ease and relevant policies are well implemented, the index may rebound in the future.

Two reasons for PMI decline

Among the 11 Purchasing Managers' Index sub-indices, only the finished goods inventory index posted an increase in June, up 1 percentage point from May. The production index, new orders index, backlog orders index, purchase volume index, purchase price index and raw materials inventory index all declined more than 1 percentage point from May.

The purchase price index, which measures the cost of raw materials, led the declines with a month-on-month drop of 3.6 percentage points. Statistics showed that the purchase price index had dropped for four consecutive months — from around 70 percent to nearly 57 percent. This reflects that the rising bulk commodity prices are having a smaller and smaller impact on domestic inflationary pressures.

Judging from the PMI, the current economic development mainly reflects the following characteristics. First, the economic growth decline shows an obviously seasonality. Except for 2009, the PMI showed decline every June since the PMI survey was first launched in 2005. The PMI decline in 2011 is lower compared with the same period of previous years.

Second, the development of the heavy chemical industry slowed down while light industry, which is more relevant to people's livelihoods, maintained a good momentum of development. Third, the development of western China has maintained momentum, the development of eastern China slowed down, and the development of central China showed a decline. Fourth, the rate of increase of market prices continues to slow down.

Zhang Bin, an associate researcher from the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, said that there are two main reasons causing the PMI decline in June: the domestic tight policy and the external debt crisis. In regard to the domestic situation, the government implemented appropriately tight monetary policy under the inflationary pressures, caused the economic slowdown and corporate economic slowdown, and led to the PMI decline.

In regard to the international situation, the European economy is facing many problems such as the public sector debt, as well as many pending issues, which have some influences on China's export growth and China's PMI.

Economic growth slowdown range to continue to narrow down

Although China's PMI in June was slightly lower compared with the previous market expectations of nearly 52 percent, it is still holding steady at more than 50 percent. This reflects that the current economy is still growing, but growth slowdown is the general trend.

Ye Tan, a financial commentator, said that China's PMI has been in decline for several consecutive months. This shows that although China's PMI still remains at more than 50 percent and is in the expansion range, the expansion energy of China's economy is not strong enough and has shown a tight state. In particular, China's investment has shown a downward trend for a long time, indicating that the monetary policy is relatively effective.

Zhou Donghai, doctor of economics at the Institute of Fiscal Science under the Ministry of Finance, said that the economic growth slowdown was not due to endogenous factors but tighter macroeconomic policies. He said, "Tighter macroeconomic policies have curbed the rise in domestic demand, slowed the economic growth and accordingly affected the import."

Experts generally said that China's inflationary momentum will continue to weaken in the second half. In terms of the purchase price index, the rise in semi-finished product prices has evidently slowed and the rise in commodity prices is mainly seen in the sectors of energy, raw materials and consumer goods. However, the factors bolstering the rise in commodity prices in the sectors will gradually weaken.

China's economic growth has showed a continued downward trend since the start of 2011. As July and August are soft seasons for industrial production and infrastructure construction, the moderation of economic growth is expected to continue in the period. However, the decline rate will continue to narrow and the economic growth will gradually be adjusted to enter a moderate range. As the inflationary pressure in China is gradually easing and the negative impacts on the economic development are weakening, the economic growth is expected to stabilize in the fourth quarter.
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