China manufacturing indices send mixed messages

Rival surveys of China's manufacturing sector offered mixed signals about the world's second-largest economy Thursday, with a private measure sinking to an 11-month low while the government's indicator showed surprising strength. British banking giant HSBC said the final reading of its purchasing managers' index (PMI) for July came in at 47.7, down from 48.2 in June and the lowest since August last year. China's National Bureau of Statistics, meanwhile, announced that official PMI rose to 50.3 last month from 50.1 in June, marking the 10th consecutive month the index has been in expansionary territory. The competing PMI surveys track manufacturing activity in China's factories and workshops and are closely watched gauges of the health of the economy. A reading below 50 indicates contraction, while anything above signals expansion. The two surveys often differ to some degree. Economists at Bank of America Merrill Lynch cited sampling and timing differences for the divergence, saying HSBC's survey was more weighted towards small exporters while the official one looks to larger companies.  Small companies were hit by a strengthening Chinese yuan, rising wages, and "sluggish global demand", they said. Sentiment in the latter part of the month, when the official survey was carried out, was likely to have been positively influenced by recent comments by Premier Li Keqiang that the government will try to realise its 2013 economic growth target of 7.5 percent, they added. But other economists said the difference was harder to explain. "We believe this divergence reflects the high level of uncertainty over China's growth outlook, although it is unclear why it emerged," Zhang Zhiwei, economist at Nomura International in Hong Kong said in a report. Economists at ANZ bank, meanwhile, questioned the integrity of the government figure. "It doesn't change our overall assessment of the deteriorating economy," they said in a report, adding that the NBS recently stopped announcing some details about its indicator. "The official PMI appears to be distorted and may delay policy adjustment, leading to policy errors," they said. The HSBC survey was unchanged from the preliminary result for July announced last week and signals "a deterioration of business conditions for the third consecutive month", the banking giant said in a release. "With weak demand from both domestic and external markets, the cooling manufacturing sector continued to weigh on employment," Qu Hongbin, HSBC's chief economist for China based in Hong Kong, said in the bank's statement announcing the figure. "Yet this, plus the recent weaker data, has prompted Beijing to introduce more fine-tuning measures, from tax breaks for small companies to increased spending on public housing, railway, energy saving and IT infrastructure areas," he added. "These targeted measures should boost confidence and reduce downside risks to growth." Worries over China's economy have intensified this year after an expected rebound has failed to appear. China's economy grew 7.8 percent in 2012, its worst performance in 13 years. The economy has since weakened further, with growth in the April-June period dipping to 7.5 percent, from 7.7 percent in the first quarter and 7.9 percent in October-December. China last week unveiled steps to boost growth, including reducing taxes on small companies as well as encouraging railway construction and foreign trade incentives. The PMI results also came after China's industry ministry late last month ordered companies in 19 sectors including cement and steel to cut production capacity as economic growth slows. About 1,300 firms were told to close outdated facilities by September and eliminate excess capacity by year-end, state media announced. China's new leaders say they want to wean the country off its traditional reliance on exports and investment and refocus the economy to one where consumer spending drives growth.