The pace of Chinese manufacturing growth slowed in June as government steps to cool the property market and curb bank lending combined with a faltering global recovery to dampen sentiment.
Two indexes based on polls of purchasing executives released on Thursday fell, though both remained above the threshold of 50 that demarcates expansion from contraction. Economists said the surveys showed an expected moderation in the world's third-largest economy and not the precipitous decline that some investors have been fearing.
Zhang Liqun, a government economist, spoke of a "steady slowdown" in the broader economy. "China's economy growth is at a critical stage of levelling off after the climb," he said.
Qu Hongbin, chief economist for China at HSBC, said the economy was clearly cooling after year-on-year growth of 11.9 per cent in the first quarter.
"But fears about hard-landing are overplayed. We expect China to achieve around 9 per cent growth in the second half, underpinned by massive ongoing investment and robust private consumption," he said.
Zhang was commenting on the official Purchasing Managers' Index, which fell to 52.1 in June from 53.9 in May. The reading, the weakest since February, fell short of the median forecast of 53.1 in a Reuters poll of 10 economists.
A separate survey compiled for HSBC fell more steeply to a 14-month low of 50.4 from 52.7 in May. It still marked modest overall expansion, but output and new orders dropped outright for the first time since the depths of the global downturn in March 2009.
The PMIs are designed to provide a timely snapshot of business conditions in manufacturing.
The official PMI also showed broad-based softness. Sub-indexes for output, new orders, new export orders, backlogs of work, imports and employment all fell on the month.
"The Chinese economy is cooling down, and the export and import sector is the first to feel the pinch," said He Yifeng, an analyst with Hongyuan Securities in Beijing.
He said the official PMI could fall further in July but might well then recover as the impact of tightening measures wanes.
"There is no need to worry too much about a double dip in the Chinese economy," he said. "If there are no new tightening measures, the Chinese economy is likely to remain healthy."
On the face of it, economists said a sharp drop in inflationary pressures - measured by the prices manufacturers paid for their inputs in June - should reassure policymakers that the risk of credit-fuelled overheating is fading.
The silver lining in an otherwise grey PMI may have helped raise spirits on the local stock market. While pan-Asian shares fell sharply on Thursday, the main Shanghai index gained 0.2 per cent after slumping 27 per cent in the first half of 2010.
Beijing is reining in credit growth and has taken a series of steps to put the brakes on the property market. It has raised down payments, scrapped discounted mortgage rates and introduced new rules making it harder for speculators to buy multiple homes.
Real estate sales and prices in some cities have tumbled in recent weeks as a result.
But although the property sector accounts for about 10 percent of gross domestic product and a quarter of investment, Premier Wen Jiabao signalled this week that it was too soon to ease the curbs.
The economy was headed in the direction the government expected and policy would not change, Wen told economists and businessmen in remarks reported on Wednesday.
According to the National Bureau of Statistics, the drop in the official PMI reflected the impact of policy tightening as well as a "grim" outlook for exports.
The debt woes rattling the euro zone, China's recent abolition of some export tax rebates and the prospect of increased trade friction were all weighing on exporters.
Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong, said slower growth in the second half was inevitable as the initial boost from last year's 4 trillion yuan stimulus package starts to fade and policy tightening bites.
"How sharp this slowdown will be will depend heavily on what happens to Chinese exports. Exports across the region have continued to post strong growth so far this year, but recent events in Europe clearly represent a major downside risk in the months ahead," he said in a note.
Reuters