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Manufacturers Suffer From ‘Olympic Effect’

Denise Tsang – SCMP – Updated on Sep 02, 2008

Mainland manufacturing shrank last month for the second consecutive month as exports softened and factories shuttered production to clear the air for the Beijing Olympics.

Slowing factory production increases pressure on Beijing to introduce new measures to avert a sharp fall in economic growth.

The purchasing managers’ index (PMI) compiled by the China Federation of Logistics and Purchasing remained at 48.4 for the second month in August. A reading below 50 means manufacturing is contracting.

Economists said the world’s fastest-growing economy was feeling the rippling impact of slowing economic activity in the United States, Japan and the European Union.

Manufacturing was likely to stabilise in the coming months when Beijing lifts anti-pollution measures that suspended factory production before and during the Olympic Games. Still, slowing global growth would continue to have an impact.

Zhang Liqun, an economist at the State Council’s development research centre, said companies continued to operate in a hostile environment even though factory gate price inflation was easing.

A separate purchasing managers’ index by CLSA slipped to 49.2 last month from 53.3 in July, the first drop since November 2005.

But CLSA said the “Olympic effect” had probably made the slump in last month’s manufacturing more severe than it really was. Factories within several hundred kilometres of Beijing were ordered to shut down to improve the air quality for athletes.

Without the Olympics, “it would have been modestly lower than July, primarily reflecting softer export orders, but still comfortably above the 50 break-even line”, said CLSA economic researcher Eric Fishwick. “Manufacturing growth is slowing but nowhere near as rapidly as the drop in the August PMI suggests.”

Morgan Stanley chief economist Wang Qing said he did not think manufacturing would shrink further in coming months as factories would gradually resume production.

“It will stabilise after the one-off factor of the Olympics-related suspension of production activities,” Mr Wang said. “Factory-gate prices will peak along with the downward trend of consumer price inflation.”

He added that shrinking manufacturing would foster a slower pace of yuan appreciation. A stronger yuan makes mainland-made good less competitive on world markets.

The yuan softened to 6.83 yesterday against the US dollar from its historical peak of 6.81 in July, according to the China Foreign Exchange Trade System.

Credit Suisse chief economist Tao Dong said a slowing economy would reduce inflationary pressure.

“The receding inflationary threat is positive news for Beijing, as the government has more policy tools and experience to deal with a growth slowdown,” Mr Tao said.

He expected that loan quotas for smaller firms would be lifted further and the reserve ratio for banks would be cut 50 basis points by the end of this year.

He also expected Beijing to beef up spending on infrastructure to avoid a sharp fall in growth.

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