Factory activity in China is falling faster than expected as the recovery falters

  • Manufacturing PMI fell unexpectedly
  • Non-manufacturing PMI declines as services slow
  • PMIs show that the economic recovery has lost steam
  • Markets slid on a weaker PMI

BEIJING (Reuters) – Factory activity in China contracted faster than expected in May on weaker demand, piling pressure on policymakers to support an uneven economic recovery and sending Asian financial markets lower.

The official manufacturing purchasing managers’ index (PMI) fell to a five-month low of 48.8, the National Bureau of Statistics said Wednesday, down from 49.2 in April and below the 50-point mark that separates expansion from contraction. The PMI also beat expectations, rising to 49.4.

Services sector activity expanded at the slowest pace in four months in May, with the official non-manufacturing PMI falling to 54.5 from 56.4.

The readings pushed markets in Asia into the red with the yuan, Australian and New Zealand dollars falling and regional stocks falling sharply.

“The PMI data reveals that China may be heading for a K-shaped recovery,” said Bruce Pang, chief economist at Jones Lang LaSalle.

“Stagnating domestic demand could affect China’s sustainable growth, if there are no effective and effective policy moves to engineer a broad-based recovery,” Pang said.

PMIs also echoed weak factory data from other parts of Asia with Japan reporting a surprising drop in production and weak South Korean production.

The world’s second largest economy is emerging from three years of pandemic lockdown, but the recovery has been uneven with spending on services outpacing activity in the factory, real estate and export-oriented sectors.

PMI sub-indices for May showed factory output swung to contraction from expansion while new orders, including new exports, fell for a second month.

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The National Bureau of Statistics said that the ferrous metal smelting and rolling industries faced a significant decline in production and demand.

In the services sector, expansion continued in the railways, air transport, accommodation and catering sectors, on the back of strong travel on Labor Day in May, while real estate activity declined.

China’s economy

loss of momentum

PMIs and other economic indicators for the month of April add evidence that the rebound is running out of steam.

Last month, imports contracted sharply, factory gate prices fell, real estate investment slumped, industrial profits fell, and both factory production and retail sales failed to meet expectations.

Analysts are now lowering their forecasts for the economy as both Nomura and Barclays have cut their 2023 Chinese GDP growth forecasts.

“Proactive fiscal policies, interest rate cuts, or interest-to-equity ratio cuts, and targeted monetary policy tools along with structural reform will be key,” Jones Lang LaSalle’s Pang added.

To stimulate credit growth, the central bank in March lowered banks’ reserve requirement ratios.

Premier Li Qiang said more targeted measures are needed this month to boost demand while China’s central bank said on May 15 that it would provide “strong and stable” support for the real economy.

Amid weakness, post-pandemic China stock rally falters as small investors turn bearish on stocks to instead double down on assets.

“The sentiment in the financial market is quite bearish. It is not clear how the government interprets the current economic situation,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “There is no indication of an imminent policy response. The government may continue to take a ‘wait and see’ stance for the time being.”

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(Reporting by Liangbing Zhao and Ryan Wu) Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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