Chinese factory output shrinks, IMF urges more tightening

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Chinese factory output shrinks, IMF urges more tightening

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As Chinese manufacturing output shrank in July, for the first time in a year, the International Monetary Fund, has said Beijing should continue its efforts to cool down the economy, including allowing its currency, the yuan, to rise in value.

A major survey of purchasing managers showed factory output down, as a result of the China central bank’s interest rate increases – which are intended to battle inflation – and reduced global demand.

The HSBC flash purchasing managers’ index (PMI) fell to 48.9 in July, suggesting the manufacturing sector contracted at its fastest pace since March 2009. When the index is below 50, that demarcates expansion from contraction.

In its annual report on China, the IMF emphasised the economy was doing well.

It pointed to risks from the possibility of a property bubble and unpredictable upside shocks to inflation and calling for more monetary tightening, including allowing the yuan to rise.

“We definitely support the idea of reducing some of the fiscal stimulus that was put in place over the past couple of years,” Nigel Chalk, IMF mission chief to China, told reporters.

The IMF said a higher yuan — a demand of many Western governments — would have limited impact on rebalancing the global economy.

In a separate IMF report on spillovers from Beijing’s policy, China’s trading partners said their biggest concern is that China’s economic growth, which has average more than 10 percent in the last decade, was unsustainable and could lead to a hard landing.

The Australian dollar and crude oil prices, which are both linked to China’s growth and the country’s appetite for resources, dipped after the PMI was released.