FTSE 100 falls on manufacturing figures and China fears

The London stock market has fallen sharply for the second consecutive day as fears over Chinese fiscal tightening were exacerbated by a surprise fall in orders in Britain's manufacturing sector. After sliding back through the 6000 mark in late trading yesterday , the FTSE 100 dropped by another 94 points, or 1.5%, to 5882 this morning. Traders said the news that China grew by 10.3% last year , more than analysts had expected, had fuelled expectations of new fiscal tightening measures in the world's second-largest economy, David Jones, chief market strategist at IG Index, said the Chinese GDP growth had "alarmed markets somewhat", hitting mining stocks which are closely linked to the China's appetite for raw materials. "China's GDP once again raised concerns that the Chinese government may impose measures to cool the economy in the near future," said Jones. Economists have warned that China's relatively loose monetary policy in 2009 and 2010 has created the danger of unsustainable bubbles, particularly in the housing sector. Inflation in China has hit 4.6%, adding to fears that the economy may be overheating. "A new wave of credit expansion is driving inflationary pressure, in both consumer prices and asset markets," cautioned IHS analyst Alistair Thornton. European stock markets were also broadly lower, with Germany's DAX dropping by around 0.8%. China's main stockmarket, the Shanghai Composite Index, fell by 2.9%. David Buik of BGC Parners said that disappointing results from Goldman Sachs yesterday had hit banks across Europe. He added that traders were taking the opportunity to take profits following the FTSE 100's strong performance in recent months. London extended its early losses after the CBI released its latest healthcheck of Britain's manufacturing sector. The industrial trends survey painted a broadly positive picture, with 32% of manufacturers reporting an increase in output in January while just 16% said output had fallen. However, the survey also showed a worrying decline in orders, with 37% saying their order book was smaller than average while 21% had more work lined up than usual. Howard Archer, economist at IHS Global Insight, said the "marked falling back in the orders balance" to -16 was probably due to a drop in domestic demand rather than a decline in exports. He added that 2011 would be tough for manufacturers if retailers stopped restocking, tighter fiscal policy weighed down on domestic demand, and the Eurozone crisis threatened foreign orders. Ian McCafferty, CBI chief economic adviser, also warned that manufacturers have raised output prices markedly during the last three months. This trend is likely to continue, pushing up the cost of living . "Manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter, and expect to raise them at an even faster pace over the next three months," said McCafferty. "This will drive further inflationary pressure in the wider economy."