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By Kevin Yao
July 21, 2011 2:14 AM EDT
China's factory sector contracted for the first time in a year in July and at its fastest pace since March 2009, a purchasing managers' survey showed on Thursday, as monetary policy tightening and slack global demand weighed on the economy.
Factory prices staged a rebound in July, underscoring the uphill battle facing the government as it tries to wrestle with inflation, which is running at a three-year high.
The vast manufacturing sector, accounting for about 40 percent of GDP, has led a slowdown in China's economic growth. But few analysts expect the economy to slump when it is underpinned by rapid urbanization and strengthening consumption.
The International Monetary Fund, in its annual report on China which was released on Thursday, said the economy was doing "quite well" and there was room to tighten monetary policy further.
Still, the latest sign of a slowdown in the economy could stir up some concerns among global investors, who are already worried by the risk of Europe's sovereign debt crisis and weakening growth in the United States.
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"With the central bank flagging no sign of an end to policy tightening, economic growth will continue to lose steam in the second half. But we don't see any risks of a hard landing and the slowdown is in the comfort zone," said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.
The HSBC flash purchasing managers' index (PMI), the earliest available indicator of China's industrial activity, fell to 48.9 in July, a 28-month low. The index was last below 50 in July 2010.
That compares with the final reading of 50.1 in the HSBC PMI for June. The 50-point level demarcates expansion from contraction, with a reading above 50 indicating growth.
"We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through," said Qu Hongbin, the chief China economist at HSBC.
"That said, resilience of consumer spending and continued investment in a massive amount of infrastructure projects should support a nearly 9 percent rate of gross domestic product growth in the rest of the year," he said.
China's industrial output rose 15.1 percent in June from a year earlier, accelerating from 13.3 percent in May, official data showed.
Economic expansion slowed to 9.5 percent in the second quarter from 9.7 percent in the first quarter. The economy is expected to retain much of its momentum in the coming quarters despite policy tightening, the latest Reuters poll shows.
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A sub-index of factory input prices in the flash data rebounded to 54.5 in July from a final reading of 51.9 in June. The sub-index for new orders dipped below 50 to its lowest in 12 months, reflecting weaker global demand.
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