Source: The Financial Times                   Date: 27 July, 2011

China’s manufacturing sector could be heading for its first contraction in a year as new orders drop and factories battle against persistent inflation, according to a survey published last week. The HSBC flash purchasing managers’ index for China, designed to provide an early snapshot of industrial conditions, has fallen to 48.9 in July, the lowest in 28 months. The final figure for this month will be published on August 1. A reading below 50 would denote a retrenchment in activity.

The weak PMI added to concerns that sustained monetary tightening by the government is weighing on growth, but analysts cautioned against overreacting, saying that the world’s second largest economy was still poised to perform strongly in the second half. Mr. Qu Hongbin, chief China economist with HSBC, said that “resilience of consumer spending and continued investment in a massive amount of infrastructure projects” would prop up the country’s growth at about 9 per cent over the rest of year. China’s economy expanded 9.6 per cent in the first half, making it the fastest-growing major economy in the world.

Premier Wen Jiabao recently said week that the government had to strike a balance between suppressing price pressures and preventing sharp swings in the pace of growth. Taking a longer-term view, the International Monetary Fund said in its annual report about the Chinese economy that the country remained “on a solid footing”, in part thanks to the employment and wage growth that have fuelled domestic consumption. However, it warned that food-driven inflation, a property bubble and declining credit quality all posed risks.