China factory orders shrink, presenting problems for Beijing

China's manufacturing activity fell to its lowest level in 11 months in March as new orders shrank.

The decline in manufacturing expansion and investment reflects the difficulty China faces in keeping its vital manufacturing sector humming in the face of a global downturn.

HSBC's preliminary manufacturing index based on a survey of factory purchasing managers dropped to an 11-month low of 49.2 in

March, from 50.7 in February. Any number above 50 indicates expansion, but the new figure shows a “slight deterioration” in Chinese manufacturing, HSBC said.

China's economy expanded 7.4 per cent last year, its slowest pace in more than 20 years. Its political leaders have set a growth target of seven per cent this year.

But Beijing is attempting to change from an economy based on manufacturing for export to one based on domestic consumption and service growth.

The current month’s figures shows domestic demand is weakening as China’s middle-class saves more and spends less.

The country needs to keep momentum in the manufacturing sector, which employs million of people.

China has made two interest rate cuts since November and reduced the amount of money banks must keep in reserve in hopes the cash would flow back into the economy.

Economists at China International Capital Corp., a Chinese investment bank, predict another rate cut and further loosening of reserve rules on the banks before the end of the year.

For Canada, China’s manufacturing downturn has led to a reduction in demand for resources, including metals, minerals and other products.

While China has been hurt by weakening demand from the rest of the world, it is also benefiting from lower commodity prices, some analysts say.