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China's Manufacturing Sector Contracts First Time In A Year

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China's manufacturing sector contracted for the first time in a year in July, as production continued to decline, final survey results from Markit Economics showed Monday. According to the survey, inflation remained muted despite accelerating from the previous month.

The HSBC manufacturing purchasing managers' index fell to 49.3 in July from 50.1 in June. This was the lowest score since March 2009, but better than the flash reading of 48.9. A PMI reading below 50 indicates contraction of the sector.

Commenting on the data, HSBC Chief Economist Hongbin Qu said this has confirmed the slowing growth momentum of the manufacturing sector against the backdrop of sustained tightening and lacklustre external demand.

"That said, the current level of the PMI is still consistent with a 12-13 percent growth rate of industrial production, which leaves room for Beijing to keep tightening policy through the third quarter to check inflation," the economist added.

New orders were close to stagnation in July and contributed to a second successive monthly decline in manufacturing production. New export orders fell for a third month in a row, though at a slower pace compared to the previous month.

Staff numbers in the Chinese manufacturing sector fell for a second successive month during July and the rate of decline was the steepest in five months.

The survey also revealed that input price inflation advanced during the month, rebounding from an eleven-month low in June. Despite the acceleration, inflation remained muted, according to the survey.

On the other hand, prices charged by manufacturers rose only marginally, with the rate of inflation easing to the slowest in the current one-year period of higher average tariffs.

The International Monetary Fund said in a report on China released last month that while inflation is expected to subside reflecting ongoing monetary policy tightening, upside risks remain, in particular from higher food and commodity prices.

Asset price developments and continued rapid credit growth, coupled with global liquidity conditions, may pose policy challenges, the Fund warned.

China's central bank hiked the key policy rates five times since October last year to contain inflation. The central bank has also lifted its reserve requirement for banks six times this year to drain excess liquidity.

Inflation in China surged to its highest level in three years in June, climbing to 6.4 from 5.5 percent in May.

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