China’s factory activity is falling faster than expected as the recovery falters

  • Manufacturing PMI unexpectedly falls
  • Non-manufacturing PMI declines as services slow
  • PMIs show the economic recovery is losing steam
  • Markets fell on weak PMI

BEIJING, May 31 (Reuters) – China’s factory activity shrank faster than expected in May as weak demand piled pressure on policymakers to slow the economic recovery and Asian financial markets tumbled.

The official manufacturing purchasing managers’ index (PMI) fell to a five-month low of 48.8, the Office for National Statistics (NBS) said on Wednesday, down from 49.2 in April and below the 50 points that separate expansion from contraction. The PMI also beat forecasts for an increase 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 sent markets in Asia into the red, with the yuan and the Australian and New Zealand dollars falling and regional shares falling sharply.

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

“Unless efficient and effective policy moves are made to build a broad-based recovery, sluggish domestic demand could weigh on China’s sustainable growth,” Pang said.

PMIs also echoed weak factory data from other parts of Asia, with a surprise decline in Japanese output and weaker South Korean output.

The world’s second-largest economy is emerging from three years of pandemic lockdowns, but the recovery has been patchy, with services spending outperforming in the manufacturing, property and export-oriented sectors.

PMI supplemental charts for May showed factory output contracted from expansion, while new orders, including new exports, fell for a second straight month.

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The chemical, ferrous metal smelting and rolling processing industries faced significant declines in production and demand, the NBS said.

In the services sector, the rail and aviation, lodging and catering sectors were expanding, while real estate activity fell on the back of strong May Labor Day travel.

China economy

Losing speed

PMIs and other economic indicators for April add to the evidence that the rebound is losing steam.

Last month, imports contracted sharply, factory gate prices fell, property investment slumped, industrial profits fell and both factory production and retail sales missed forecasts.

Analysts are now lowering their expectations for the economy, with both Nomura and Barclays cutting China’s 2023 GDP growth forecasts.

“Active fiscal policies, rate cuts or RRR cuts, and targeted monetary policy instruments and structural reforms will be key,” added Pang of Jones Lang LaSalle.

To encourage credit growth, the central bank cut banks’ reserve requirement ratios in March.

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

Amid the weakness, China’s post-pandemic stock rally is faltering as short-term investors double down on stocks instead of safer assets.

“The sentiment in the financial market is very poor. It is not clear how the government interprets the current economic situation,” said Shiwei Zhang, chief economist at Pinpoint Asset Management. “There is no sign of an immediate policy response. The government may continue to adopt a ‘wait and see’ stance for now.”

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Reporting by Liangping Gao and Ryan Wu; Editing by Sam Holmes

Our Standards: Thomson Reuters Trust Principles.

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