Chinese manufacturer

Amid sluggish exports and fears of recession in Europe, Chinese manufacturing showed signs of improvement in January, as new orders rose to a three month high. The official Purchasing Manager’s Index (PMI) stood at 50.5 in January, up from 50.3 recorded in December, which was higher than the economists’ forecast of 49.5. A reading above 50 indicates expansion in manufacturing activity. Indexes for export orders, imports and employment showed a deeper decline. The index for new orders rose to its highest level since October, and stood at 50.4 in January, which is a substantial increase from 49.8 in December. However the index for new exports orders fell for the fourth consecutive month, and dropped to 46.9 from December’s 48.6. HSBC, in a similar survey, reported that manufacturing had contracted the least in three months, adding further credence to the view that the sector may be bottoming out.

Copper and aluminum prices reacted positively to the news on the London Metals Exchange.

The Chinese central bank is moving towards a looser policy regime to try and avert a sharp growth slowdown. But lingering fears about inflation could lead to a gradual move. The government has so far refrained from cutting the benchmark interest rates. Against the forecast by some analysts, the central bank did not go ahead with a reduction in bank-reserve requirements in January. The People’s Bank of China has instead preferred to add cash to the financial system through reverse-repurchase operations. This huge capital infusion exercise, largest in almost four years, saw the money-market rate take the biggest monthly drop in January in six months.

Despite the improvement in manufacturing, most economists fear that weak exports and a slowdown in the rate of property investment will lead to a further slowing of the Chinese economy in the first quarter. They point to the fact that the official PMI, which gives greater weightage to the big state firms, generally provides a more optimistic view of Chinese factories, and prefer to rely on the PMI produced by HSBC, which takes into account the small private firms that have been the worst hit by weaker demand and credit curbs. Some economists also said the January PMI data may have been distorted by a weeklong holiday.

The IMF last week slashed its 2012Chinagrowth forecast to 8.2 percent from an earlier estimate of 9 percent. According to Qu Hongbin, Chief China Economist at HSBC, the economic growth will slow down to as little as 8 percent in the first quarter of 2012. This would be the weakest pace of growth in almost three years, down from 8.9 percent in the fourth quarter of 2011.