International | Oct 03 2006
By Chris Shaw
For several months Chinese authorities have been introducing new measures designed to slow the pace of expansion of the economy, only for subsequent data to continually show these measures have had little effect.
But there are signs the measures, which include higher interest rates and restrictions on bank lending, are finally beginning to impact at least according to CLSA Asia Pacific Markets. The group notes its latest Purchasing Manufacturers Index (PMI) figures for September show a decline to 52.4 from 52.6 in August, an outcome that is the lowest since March this year.
The PMI attempts to provide a broad measure of the health of the manufacturing sector, so a fall in the figure indicates conditions aren’t as strong as had been the case. In CLSA’s view this can be attributed to both output and new orders rising at their slowest rates for six months, while export orders also rose at a slower pace than the previous month.
This decrease in the pace of growth in exports has CLSA suggesting the Chinese economy now appears more exposed to external demand than had previously been the case. As global growth looks likely to slow and the US faces a potential downturn thanks to recent declines in its housing market, the potential remains for Chinese growth to slow further in coming months.
The other point of note from the figures according to CLSA is the significant increase in input costs thanks to higher prices for steel, chemicals, textiles and oil in particular. While companies have attempted to pass this on through higher prices this appears to have been only partly successful, meaning input price inflation has accelerated since August. The seasonally adjusted Input Price Index rose to 62.3 from 60.4 in September.
In CLSA’s view this implies competitiveness in the Asian region is now moving south, so the advantages China enjoyed in terms of lower wage costs and the ability to produce goods more cheaply than other countries is now being challenged.
Despite this, it notes employment overall grew at its fastest pace for almost two and a half years in September, meaning demand overall remains solid. It also reflects longer delivery times for products, indicating production performance is deteriorating as companies struggle to deal with stronger demand.
