China's economy sends slowdown signals
(Reuters)
Updated: 2005-08-02 06:55

China said the fall in its official PMI was due to a variety of factors, ranging from weaker export orders in July to power crunches that hit output.

The industrial cooling seen in reports such as the PMI has yet to be reflected in China's headline gross domestic product growth, which was an annual 9.5 percent for the second quarter, the eighth straight quarter of growth over nine percent.

"But because the PMI has the significance of being a leading indicator, the falling trend may presage the possibility that the economy will show a downward trend in the second half," the report quoted index analyst Zhang Liqun as saying.

Profits squeeze

The rise in the CLSA index mainly reflected stronger output and new orders. However, growth in both remained below the long-run average because of the oversupply of certain products, which has been weighing on company profits.

Jim Walker, CLSA's chief economist, said, "The margin squeeze in China shows no signs of letting up although, for domestic producers, the small revaluation of the renminbi will have had some relieving effect from late July onwards -- assuming, of course, that the margin enhancement is not met with further output price falls."

China revalued the yuan, or renminbi, by 2.1 percent on July 21 and said its value would henceforth be managed with reference to a basket of currencies instead of being pegged to the dollar.

The State Information Center said in a report obtained by Reuters the revaluation would theoretically cut half a percentage point off GDP growth by the end of next year.

But because the yuan had been revalued at a time of cyclical strength, the overall economic impact would be less pronounced, said the group, a think-tank under China's main economic policy body, the National Development and Reform Commission.

"The cooling effect of the revaluation will be mild," the report said.

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