Surveys show China manufacturing in July still weak, with smaller firms bearing more pain

Chinese manufacturing remained weak last month with small and midsized private businesses suffering a bigger share of the pain, two surveys indicated Thursday, adding to an uncertain outlook for the world’s No. 2 economy.

The official China Federation of Logistics and Purchasing’s manufacturing index strengthened slightly to 50.3 from June’s 50.1. Separately, the private HSBC purchasing managers’ index fell to an 11-month low of 47.7 from 48.2 in June. Both use a 100-point scale on which numbers below 50 indicate contraction.

The unexpected rebound in the official survey offered a glimmer of hope that China’s slowdown is stabilizing. “But It is still too early to conclude a decisive growth rebound” because the pickup “is still far too modest to suggest a clear upward trend,” said Wei Yao, China economist at Societe Generale.

The results also reflect how China’s small and medium-sized private enterprises, which analysts say make up a bigger share of HSBC’s survey, are more vulnerable to Beijing’s efforts to tighten up lending as well as to slumping global export demand for toys, clothing, electronics and other manufactured goods.

China’s big state-owned companies, which take an outsize role in the official survey, have easier access to bank loans and hardly compete in export markets.

The HSBC report, covering 420 companies, said output at Chinese manufacturers fell as total new orders dropped at the sharpest rate in 11 months because of a decline in new business in both China and overseas. Export orders fell for the fourth straight month, though at a slower pace. Exporters told researchers that new sales to Europe, Southeast Asia and the U.S. fell from June. Chinese manufacturers shed jobs at the fastest pace in four years.

The federation’s survey of 3,000 businesses, meanwhile, found production, new orders and most other sub-indicators ticked up. New export orders improved but remained below an index reading of 50 last month.

Fallout from China’s manufacturing slump may be felt globally, as declining orders result in less demand for commodities from countries such as Australia and Brazil and for industrial components from Southeast Asia, Taiwan and South Korea.

China has recorded five straight quarters of growth below 8 per cent, a substantial economic cooling for a country that previously grew at double-digit rates.

Analysts said the survey results indicate smaller private companies may still be feeling the effects of a credit shortage that began in June as Chinese regulators try to rein in a lending boom over fears it could race out of control. The credit crunch caused interest rates on loans between banks to spike to a record high.

“Smaller companies probably have been affected more by the liquidity squeeze,” said Yao.

China’s central bank wants to tighten lending standards, which should reduce risk but is likely to reduce financing for private businesses that generate China’s new jobs and wealth.

“We shouldn’t dismiss the positive side in the official PMI, but at the same time the HSBC PMI is a reminder that things are still difficult especially, with smaller companies,” she said. “So basically that suggests as a whole if there is a recovery, it’s a very gradual one and it’s still quite unstable.”