China’s factory activity falls faster than expected as recovery stumbles

BEIJING, May 31 (Reuters) – China’s factory activity shrank faster than expected in May on weaker demand, mounting pressure on policymakers to prop up a shaky economic recovery and sinking Asian financial markets.

The official manufacturing purchasing managers’ index (PMI) fell to a five-month low of 48.8, the National Bureau of Statistics (NBS) said on Wednesday, down from 49.2 in April and below the 50-point mark that separates expansion from contraction. The PMI also raised 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 pushed 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 reveal that China may be heading for a K-shaped recovery,” said Bruce Pang, chief economist at Jones Lang LaSalle.

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

The PMIs also echoed weak factory data from other parts of Asia, with Japan reporting a surprise drop in output and weakening South Korean production.

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

PMI sub-indices for May showed that factory output eased from an expansion while new orders, including new exports, fell for a second month.

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

Within the services sector, rail and air transportation, lodging and catering remained in expansion, on the back of strong May Labor Day travel, while real estate activity fell.

LOSING MOMENTUM

The PMIs and other economic indicators for April add to the evidence that the recovery is losing momentum.

Last month, imports fell sharply, factory gate prices fell, real estate investment fell, industrial profits plunged and factory production and retail sales missed forecasts.

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

“Proactive fiscal policy, interest rate cuts or RRR cuts and targeted monetary policy tools along with structural reforms will be key,” Jones Lang LaSalle’s Pang added.

In order to stimulate credit growth, the central bank cut the banks’ reserve requirements in March.

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

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

“Financial market sentiment is quite bearish. It is not clear how the government interprets the current economic condition,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “There are no signs of an imminent policy response. The government can continue to take a ‘wait and see’ attitude for now.”

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

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