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Factory Activity Slows in China

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Falling factory activity in China, mirroring lower demand both among domestic and foreign customers, may force Beijing to turn to growth policies to keep its economy revved up.

Reuters reported that the HSBC Purchasing Manager’s Index, which works to preview Chinese industrial conditions before the publication of official output data, rose just slightly to 48.7 in December from November’s 47.7, which was a 32-month low. It failed to reach the flash reading of 49.

Since July the PMI has mostly remained below 50, the demarcation point for expansion versus contraction, as it feels the effects of reduced consumption from the eurozone debt crisis and a slow U.S. economy.

As a result, it is thought that the People’s Bank of China will likely lessen its Required Reserve Ratio to free up cash from banks and stimulate more business.

Qu Hongbin, China economist at HSBC, was quoted saying, “While the pace of slowdown is stabilizing somewhat, weakening external demand is starting to bite. This, plus ongoing property market corrections, adds to calls for more aggressive action on fiscal and monetary fronts to stabilize growth and jobs, especially with prices easing rapidly.”

Still, China’s industrial growth is believed by HSBC to remain about 12% to 13% even with the PMI as low as 48.

It looks likely that China’s economy will slow for a fourth consecutive quarter. Q1 saw an annual growth rate of 9.7%, but subsequent quarters have not kept up, and Q4 looks likely to come in below 9%.

Earlier in December, a Reuters poll of economists said they believed that the PBOC would ill cut the reserve ratio by 200 basis points by the end of 2012, but hold off from cutting interest rates unless quarterly GDP growth falls below 8%.

Guotai Junan Securities economist Wang Hu in Shanghai was quoted saying, “I think the government will ratchet up pro-growth policies if [quarterly] growth falls below 8%; otherwise, the economy could face big risks. Another RRR cut could happen any time.”