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Monday, September 01, 2008

August PMI Indicates Continuing Contraction In Chinese Manufacturing

Manufacturing in China contracted for a second month in August, according to the latest reading on the manufacturing PMI. The China Federation of Logistics and Purchasing Purchasing Managers' Index registered a seasonally adjusted 48.4 in August, unchanged from July.

The Chinese authorities have become increasingly concerned that the impact of a global slowdown may weigh heavily on their export oriented economy, and they have recently attempted to put a brake on gains in the yuan and have also loosened lending quotas to help exporters and small businesses following four quarters of slowing economic growth. China's growth slowed to a 10.1 percent annual rate in the second quarter of this year, coming down quarter by quarter from the high of 12.6 percent attained in the second quarter of 2007.

The government is considering spending an extra 400 billion yuan ($58 billion) to stimulate the economy, according to reports in Chinese news media. A plan awaiting approval from the State Council and the National People's Congress includes 220 billion yuan of spending and 150 billion yuan of tax cuts, the Beijing-based Economic Observer newspaper reported last week. In addition China has tripled railway spending this year to 300 billion yuan. The current five-year plan, which runs through 2010, calls for investing almost 4.8 trillion yuan on power stations, waterways, roads and other infrastructure projects -- more than the combined output of Taiwan, Thailand and Vietnam. Reconstruction after May's Sichuan earthquake could cost another 1 trillion yuan, the government says.

Monetary policy may also be loosened, and the People's Bank of China said in August that it would ``fine-tune'' monetary policy to cushion the economy as overseas demand weakens. This is being widely interpreted as meaning that the central bank will reduce the portion of deposits banks are required to hold as reserves - possibly by as much as 2.5 percentage points, bringing the level down to 15 percent.