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China's manufacturing slows for second straight month

July 01, 2013|By Shan Li
  • China's manufacturing sector weakened again in June amid a credit crunch and a decline in U.S. and European orders. Above, workers sew fabrics at a garment factory in Jiujiang in central China's Jiangxi province.
China's manufacturing sector weakened again in June amid a credit… (Associated Press )

In another sign that China's booming economy may be slowing, the country's manufacturing sector contracted in June after facing a credit crunch and seeing a decline in orders from Europe and the U.S., a survey said.

For the second straight month, the HSBC purchasing managers index for China stood below 50 points, which indicates a decline in manufacturing as export demand dropped and domestic consumption failed to make up the difference.

That decline has many countries nervously watching to see whether it will have broader implications on the global economy.

China is the world’s largest exporter and the largest or second-largest trading partner for 78 countries, so any slowdown has global consequences, said Ferdinando Guerra, an economist specializing in international trade at the Los Angeles County Economic Development Corp.

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Guerra said the reduction in manufacturing illustrates how integrated the international arena has become. He largely blames China’s manufacturing cuts on reduced demand from Europe’s struggling economies. That in turn has pushed down demand for raw materials and components from countries such as Brazil, South Korea and Taiwan.

Some economists predict that China will miss its annual target growth rate for the first time since the 1990s as the government tries to rein in reckless lending that authorities fear could spiral out of control. Efforts to restrict such practices have led to a cash squeeze among banks and rising interest rates.

"Falling orders and rising inventories added pressure to Chinese manufacturers in June," HSBC chief economist Hongbin Qu said in a statement. "And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending."

The HSBC index, which looks at 420 manufacturers, reported the sector lost jobs at its fastest pace in 10 months as new export orders saw the biggest drop in nine months.

The Chinese government has increased its efforts to shift the economy from being dependent on cheap exports and capital investment to one that relies more on domestic consumption. Economists predict that even if those efforts are successful, the country will suffer growing pains along the way.

In the first quarter, the country's economic growth dropped to 7.7% from 7.9% in the fourth quarter. There is speculation that the latest credit crunch may result in future growth rates below 7%.

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Follow Shan Li on Twitter @ShanLi

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