The manufacturing slowdown in China continues for the third consecutive month prompting a Bloomberg headline China Manufacturing Boosts Case for Easing

A Chinese purchasing managers’ index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

China’s central bank last month reduced banks’ reserve requirements for the first time in three years to encourage lending and Premier Wen Jiabao this month reiterated a pledge to “fine-tune” policies as needed to support growth.

The nation’s central bank is allowing the five biggest lenders to increase first-quarter credit by a maximum of about 5 percent from a year earlier, said two people at state lenders who have knowledge of the matter. Separately, the banking regulator is weighing a plan to relax capital requirements, according to four people with knowledge of the matter.

China’s gross domestic product increased 8.9 percent in the last three months of 2011 from a year earlier, the fourth straight quarterly slowdown and the weakest pace in 10 quarters. Growth may drop to below 8 percent this quarter, according to estimates from UBS AG, Nomura Holdings Inc. and Societe Generale SA, as export demand cools further and the government maintains its campaign to rein in housing costs.

Home prices fell last month in 52 of 70 Chinese cities from November, according to government data released Jan. 18. The world’s largest exporter posted the smallest gains in overseas sales and in imports for two years in December from a year earlier, excluding holiday distortions.

Romney’s Tough China Talk

Please consider Romney’s Tough China Talk May Fall Flat in SC

While Mitt Romney is a long way from the White House, he already knows what he would do on his first day in the Oval Office: crack down on Chinese “cheating” on trade.

Romney vows to designate China a “currency manipulator” and impose duties on its imports if the yuan isn’t allowed to float freely. As Republicans prepare for tomorrow’s presidential primary in South Carolina, that pledge may cheer companies such as steelmaker Nucor Corp. (NUE), which has a plant in Darlington and is among those blaming Chinese subsidies for eroding profits.

Yet South Carolina, long a battleground for textile makers fighting to block imports, is increasingly prospering through overseas ties and could suffer in any trade war. Companies such as France’s Michelin & Cie., Germany’s Bayerische Motoren Werke AG and Sweden’s Husqvarna AB employ more than 102,000 state residents. And a dozen Chinese manufacturers have set up shop.

“We can’t be protectionist; look at who our biggest employers are,” said Bob Faith, former state commerce secretary, who cited several foreign-owned companies. “That is South Carolina, and these are South Carolina jobs.”

China ‘Threat’ Plays

“The ‘Communist Chinese are a threat to our economy and way of life’ gets play among a broad spectrum conservative base no matter where you sing that tune,” e-mailed Scott Huffmon, director of the Social and Behavioral Research Laboratory at Winthrop University in Rock Hill. “It just so happens that the 2012 tour is swinging through S.C. this week.”

Other Republican candidates have warned of China’s emergence. Former House Speaker Newt Gingrich has described the nation’s rise as a “threat,” although he says the U.S., which ran a $26.9 billion trade deficit with China in November, can defeat the challenge by rebuilding its manufacturing base and maintaining a strong defense.

At a candidates’ debate last night in North Charleston, Representative Ron Paul said Americans “shouldn’t be frightened about trade” because it often helps them to save money by buying cheaper products from overseas. Former Senator Rick Santorum said the corporate tax rate should be cut to zero for companies that manufacture in the U.S. to stem the loss of American jobs.

I do not know if his Romney’s talk will fall flat in South Carolina, but I do know the results will be a disaster if actually implemented. Expect to see a net loss of jobs if Romney is economically-stupid enough to do what he says.

If Romney increases tariffs three things will happen, all of them bad.

  1. Prices will rise
  2. Growth will slow
  3. China will retaliate with tariffs of its own or by buying more goods from Europe instead of  goods from US produces 

In essence everyone will pay higher prices for goods and services in hopes of bring back a few hundred manufacturing jobs (while losing tens-of-thousands of jobs in the ensuing economic slowdown). Once again, Ron Paul is the only candidate on the right side of this issue.

Mike “Mish” Shedlock
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