Chinese factories feel pinch from tight credit

Mainland factories produced at their slowest pace in nine months this month, the latest sign the manufacturing sector is struggling amid falling export orders and soaring credit costs.

Analysts forecast the weakness in manufacturing might persist for some time as Beijing focuses on financial risks to the economy and appears reluctant to inject fresh liquidity.

The State Council headed by Premier Li Keqiang has given no indication it is about to loosen the grip on credit. Instead, "stability" was repeatedly mentioned in a statement concluding a cabinet meeting chaired by Li on Wednesday. The cabinet pledged to push forward reforms "gradually, orderly and continuously" and vowed to "strictly" prevent financial risks.

Goldman Sachs economist Song Yu said: "The focus on financial risks has been the main driver of the recent liquidity tightening, and we expect it to slow growth in the near term."

However, he said the country might benefit from the new leadership's approach in the longer term. "The flip side to this new approach is that the reform measures should reduce systemic risks and possibly raise the level of potential growth," he said.

A preliminary survey of factory output released yesterday shows manufacturing businesses contracted for a second month.