By Daniel Hunter

After adjusting for seasonal factors, the Chinese HSBC Purchasing Managers’ Index (PMI) — a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy — posted an eleven-month low of 47.7 in July, down from 48.2 in June, therefore signalling a deterioration of business conditions for the third consecutive month.

Production levels at Chinese manufacturers declined for the second month in a row in July. The rate of contraction quickened slightly, but remained modest overall. Lower output was driven by a further decline in new business, in both domestic and international markets, with the net fall in total new orders the sharpest for 11 months. New export orders, in contrast, fell at a reduced pace, though have now declined for four months in a row.

Anecdotal evidence indicated deteriorating market conditions, both domestically and internationally, had led to reduced client demand. Exporters reported that new sales to Europe, South East Asia and the United States were all lower compared to June levels.

Payroll numbers were cut for the fourth successive month in July, with the rate of job shedding the quickest since March 2009. According to some respondents, the reduction was due to a combination of employee resignations and company downsizing. Despite further job losses, backlogs of work fell modestly over the month, with a number of firms citing spare capacity at their plants.

Manufacturers reduced their input buying for the third month running in July, albeit at a modest pace. As a result, suppliers’ delivery times marginally improved for the fourth month in a row. Stocks of purchases also fell since June, with a number of respondents mentioning that stocks were depleted in line with reduced order book volumes and associated lower production requirements.

Finally, on the price front, cost pressures continued to ease. Average input costs fell at the slowest pace in four months but still at a marked pace overall as imported goods were reported to be lower in price. Reduced operating costs were passed on to clients through a fall in output charges. Average tariffs have now decreased for five months in a row, although the pace of discounting eased since June and was the slowest recorded since March.

“With weak demand from both domestic and external markets, the cooling manufacturing sector continued to weigh on employment," Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said.

"Yet this, plus the recent weaker HSBC China Manufacturing PMI 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. These targeted measures should boost confidence and reduce downside risks to growth.”

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