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Asia Economy Last Updated: Jan 2, 2014 - 7:31 AM

China's manufacturing slowed in December; Overcapacity in several sectors
By Michael Hennigan, Finfacts founder and editor
Jan 2, 2014 - 6:09 AM

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Two monthly purchasing managers' index (PMI) surveys show that China's manufacturing slowed in December as the serious attention is turning to overcapacity in several sectors that has been boosted by aggressive local government subsidies.

Rising wages and a stronger currency are also factors as the yuan/ renminbi rose about 3% against the dollar last year while other Asian currencies, including the Indian rupee and the Indonesian rupiah, plunged. Low-cost manufacturing has been moving from Chine while, on Tuesday, Revlon the US cosmetics company said it was closing down its operations in China to cut costs, eliminating about 1,100 positions. Revlon said its China business represented about 2% of total sales and the move would lead to savings of about $11m a year.

Finfacts: Commodity prices down in 2013; Gold plunges; US dollar and euro rise

For the last year China has reported that total social financing was up 13.2% in the first 11 months of 2013 from a year earlier while growth in the real economy slowed to about 7.6%, its slowest pace in years.

An audit of government debt published Monday showed that local government debt and liabilities, came to 17.9tn yuan ($2.95tn) at end-June, a rise of 67% in two-and-a-half years. Local government support is blamed for manufacturing capacity in several sectors.

The  ministry of industry and information technology in a report on Monday ranked overcapacity as a major challenge in 2013, saying that outdated production lines involving 1,569 companies were forced to shut down in the last year.

SEE: today's Finfacts Premium report: China to force drastic shakeout of solar cell industry

The official PMI, which was published on Tuesday and focuses on big state companies, showed that the index fell in December to 51.0, slightly below expectations, from 51.4 the month before. Today, the HSBC PMI report which mainly reflects activities of private companies, showed that while Chinese manufacturers signalled a further expansion of output in December, the rate of growth eased from the previous month. New orders also rose at a fractionally slower pace, with foreign sales posting a slight decline for the first time in four months. Staffing levels fell for the second month in a row, while backlogs of work increased at a moderate pace. After adjusting for seasonal factors, the HSBC PMI was at posted at 50.5 in December, down from 50.8 in November.

Wei Yao, an economist at Société Générale, the French bank, commented today: "Destocking of finished goods quickened - - the explanation would be either less confidence among manufacturers in the outlook or seasonal slowdown in input procurement. Judging from the past data pattern, it seems somewhat more of the former…Overall, the report suggests weakening growth momentum in China’s manufacturing sector, as we have anticipated. We expect the impact of tight liquidity conditions to become pronounced entering the first half of 2014."

Hongbin Qu, chief economist, China & Co-Head of Asian Economic Research at HSBC, the British headquartered bank, said: "“The moderation of December's final HSBC China Manufacturing PMI was mainly due to slower output growth. However, the final PMI sustained the fifth above-50 reading in a row thanks to a steady increase of new orders. The recovering momentum since August 2013 is continuing into 2014, in our view. With inflation still benign, we expect the current monetary and fiscal policy to remain in place to support growth."

Elsewhere in Developing Asia, the Indian manufacturing sector ended 2013 on an encouraging footing. Operating conditions improved for the second successive month in December, as both output and new orders increased. Consequently, firms raised their workforce numbers further in the latest month. PMI was down slightly from 51.3 in November to 50.7 in December.

The HSBC South Korea PMI rose to a seven-month high in December, posting a reading of 50.8, up from 50.4 in November. This was the third successive month in which the PMI signalled an improvement in operating conditions at South Korean manufacturers.

December data indicated that manufacturing operating conditions in Indonesia improved for the fourth successive month. Underpinning the latest expansion was a renewed growth of output and increased new order levels. Export demand broadly stabilised, after contracting in each of the previous six months. Up from 50.3 in the previous month to 50.9 in December, the seasonally adjusted HSBC Indonesia PMI posted above the crucial 50.0 threshold for the fourth consecutive month.

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