Investors would do better to worry about the continuing drought in central and southern China than another dip in a key manufacturing index for May.
The HSBC Market preliminary purchasing managers index flash estimate yesterday show the gauge falling to 51.1 in May, the lowest it has been for 10 months and well down from the 51.8 in April.
The news sent Chinese shares lower with the Shanghai index down 2.9% to its lowest level since February.
Investors and analysts all blamed the interest rate rises, jawboning from the government and increases in bank reserve ratios.
These moves are aimed at trying to rein in inflation, which hit an annual rate of 5.3% in the year to April (down from 5.4% in April).
HSBC’s preliminary manufacturing index is based on 85% to 90% of the total responses to its monthly purchasing managers’ survey sent to executives in more than 400 manufacturing companies.
(similar advance indexes for Europe showed activity slowing as well).
New export orders contracted in May and stocks of purchases and finished goods fell at a faster rate.
HSBC said an output gauge fell to a 10-month low, although it remained above the 50 level that divides expansion from contraction.
The final index is issued on the last day of each month.
But the widening drought will make it much harder to control inflation, let alone reduce it.
The drought comes after wheat growing areas in the north were hit by a big drought during the northern winter and early Spring.
Now some of China’s main rice growing regions are drought stricken, with daily reports in official Chinese media of the problem.
Xinhua reported yesterday that the Yangtze River, China’s longest, has been plagued by a severe drought, with the lowest level of rainfall this year since 1961.
The spring drought has affected Jiangxi, Hunan and Hubei provinces in the middle and lower reaches of the River, which have received 40% to 60% less rainfall than on average.
Some regions have been overwhelmed by the lingering drought, which has seriously affected irrigation and water supply.
And while rainfall has improved this month, it has not been enough to make up anywhere near the deficiency in Hubei, Hunan, Jiangxi, Anhui and Jiangsu provinces.
Hunan is one of China’s largest rice-growing provinces, which produced 30.5 million tonnes of rice last year.
With food prices up more than 11% this year and driving inflation higher (along with higher oil prices), the last thing China wants is an explosion in rice prices later this year if the harvest falls short.
The central government has already released corn, wheat and oilseeds from its strategic stockpiles this year to try and dampen prices and help control inflation.
And the drought and very dry conditions in other parts of China are already impacting the economy with power blackouts reported and warnings of more to come in the summer.
They will put downward pressure on production if they become widespread, like they were in parts of the country in the second half of 2010.
