China's factory sector shrinks

China's factory sector shrank for the first time in a year in July, a survey showed on Thursday, feeding worries among the country's main trading partners that its growth is unsustainable and could lead to a slump.
The HSBC flash purchasing managers' index (PMI) fell to 48.9 in July, suggesting the manufacturing sector contracted at its fastest pace since March 2009, as monetary policy tightening and slack global demand weighed on the sector.
The PMI is the earliest available indicator of industrial activity in the world's second-biggest economy. It also showed that factory prices rebounded quite sharply in July, accentuating the tough battle China's authorities have on their hands as they try to keep inflation in check with minimal fallout on demand and growth.
Chinese authorities have made clear that fighting inflation is their priority and that stance won backing from the International Monetary Fund, which said on Thursday Beijing should persist with tightening policy, including allowing the yuan to rise in value.
In its annual report on China, the IMF emphasised the economy was doing well.
Yet, in a separate IMF report on spillovers from Chinese policy, China's trading partners said their biggest concern is that China's economic growth, which has average more than 10 percent in the last decade, was unsustainable and could lead to a hard landing. "We are slowing, clearly," said Stephen Green, China economist at Standard Chartered Bank in Hong Kong, who felt monetary policy would be less stringent by the fourth quarter.
The HSBC flash PMI of 48.9 for July was the lowest reading in 28 months and fell from the final reading in June of 50.1. The index was last below 50, which demarcates expansion from contraction, in July 2010.
The vast manufacturing sector, accounting for about 40 percent of GDP, has led the slowdown in China's economic growth this year. The flash PMI showed a new-orders sub-index fell below 50 to its lowest level in 12 months, reflecting the weaker global demand.
The slowdown has weighed on global investors, already worried by the risk of Europe's sovereign debt crisis and weakening growth in the United States.
The Australian dollar and crude oil prices, both leveraged to China's growth and appetite for resources, dipped after the PMI was released. The IMF's annual report was reasonably sanguine, citing as risks the possibility of a property bubble and unpredictable upside shocks to inflation and calling for more monetary tightening, including allowing the yuan to rise.
"We definitely support the idea of reducing some of the fiscal stimulus that was put in place over the past couple of years," Nigel Chalk, IMF mission chief to China, told reporters.
The IMF said a higher yuan - a demand of many Western governments - would have limited impact on rebalancing the global economy. But it was vital to financial reforms and re-balancing demand within China. It said the yuan was somewhere between 3 percent and 23 percent undervalued.
Indeed, while the flash PMI points to a monthly fall in Chinese industrial output, government data shows that the annual pace of industrial output is healthy at around 15 percent.
The economy grew 9.5 percent in the second quarter, just a shade slower than 9.7 percent in the first quarter. A Reuters poll on July 18 showed the economy is expected to grow 9.3 percent this year.
Still, the IMF survey showed the first issue of concern among China's trading partners about its domestic policies was that they could lead to unsustainable growth and a hard landing.