China Manufacturing Contracts for 3rd Month, Monetary Easing Expected

China's manufacturing activity slowed for a third consecutive month in January, according to a survey of purchasing managers on Friday, which could compel Beijing to take steps to stimulate growth in the world's second-largest economy.

The preliminary HSBC China Manufacturing Purchasing Managers Index rose marginally to 48.8, compared with a final reading of 48.7 in December, HSBC Holdings PLC said. A reading below 50 indicates contraction from the previous month, while anything above that indicates expansion.

Most of the weakness in the index came from a sharp cutback in inventory, which declined from 51.3 to 48.4. By contrast, new orders improved from 46.9 to 49.5, resulting in a marked improvement in the new order-inventory-balance. The current output component declined from 49.5 to 47.0. Overall, these numbers suggest that the January shortfall was largely driven by inventory correction, while there were some improvements in final demand.

Despite the upside surprise of industrial production growth in December, the ongoing slowdown of investment and exports implies more headwinds to growth and likely destocking pressures for manufacturers in the coming months, Qu Hongbin, HSBC's chief China economist, said in a statement. We expect more policy easing to stabilize growth.

Qu said he expects China's gross domestic product growth to slow to around 8 percent in the first quarter from 8.9 percent in the fourth quarter of 2011.

The preliminary China PMI figure is based on 85 percent to 90 percent of total responses to HSBC's monthly PMI survey. The final PMI reading for January is due Feb. 1.

China's Center for Forecasting Science expects the appreciation of the Renminbi against the dollar to slow to 3 percent this year from 4.7 percent in 2011, which is good news for China's exporters.

Last year, China created 12.2 million jobs in urban areas, the Ministry of Human Resources and Social Security said. The urban unemployment rate stood at 4.1 percent as of the end of 2011.