China manufacturing at 28-month low: HSBC

BEIJING: Manufacturing activity in China contracted for the first time in a year in July and hit a 28-month low, early HSBC data showed Thursday, the latest sign tightening measures are impacting the economy.

However, the figures also indicated that despite several interest rate hikes aimed at tempering stubbornly high inflation the cost of raw materials continued to rise.

HSBC's preliminary purchasing managers index fell to 48.9 in July from a final reading of 50.1 in June, the British banking giant said.

A reading above 50 indicates the sector is expanding, while a reading below 50 indicates contraction.

The July reading, which is subject to revision when the bank publishes its final figures on August 1, was the lowest since March 2009 and fell below 50 for the first time since July 2010.

"We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through," HSBC chief economist Qu Hongbin said in a statement.

The world's second-largest economy is still likely to grow nearly nine percent in the rest of the year, supported by resilient consumer spending and continued massive investment in infrastructure projects, he said.

But what will likely cause a headache for policymakers is data showing the price of raw materials rose at a faster rate in July than the previous month, indicating manufacturers remain under significant inflationary pressure.

Chinese officials have been pulling on a variety of levers to prevent the economy from overheating and rein in inflation -- which hit a three-year high of 6.4 percent in June -- amid fears high prices could trigger social unrest.

In a bid to stop money flooding the system Beijing has increased the amount banks must hold in reserve several times -- which cut lending 10 percent in the first half of 2011 -- while interest rates have risen five times since October.

Economic growth slowed to 9.5 percent in the second quarter from 9.7 percent in the first three months of the year and 9.8 percent in the fourth quarter of 2010.

Copyright AFP (Agence France-Presse), 2011