Chinese manufacturing output contracts for first time in 17-months

Chinese manufacturing activity grew at its slowest rate for 17 months in July, as the government continues with its efforts to rein bank lending on concerns that its state-owned banks may have to write-off nearly $253-billion in bad loans as well as an economy that could be overheating.

The HSBC China Manufacturing Purchasing Managers Index (PMI) that was released yesterday showed that China's manufacturing output slid from 52.1 in June to 51.2 in July, the first time since March 2009.

The Chinese manufacturing slowdown indicates that the global economic recovery continues to sputter, with Alan Greenspan, former chairman of the US Federal Reserve, warning that the US economy, the world's largest, may be heading for a double-dip recession.

The HSBC China PMI is in line with China's statistics bureau and the Federation of Logistics and Purchasing's PMI released yesterday, which revealed the country's manufacturing output slid to 51.2.

Analysts surmise that the slowdown is due to Chinese banks making it harder to lend amid fears that they could find it difficult to recover about $253 billion or 23 per cent of the 7.7 trillion yuan ($1.1 trillion) they lent to local government financing vehicles for funding regional infrastructure projects. (See: Chinese banks may write off nearly $253-bn in bad loans) 

As bank lending tightened, property prices that were booming started to cool off, affecting manufacturing.