China Manufacturing Activity Falls Unexpectedly as Market Demand Shrinks
China’s official manufacturing PMI fell to 49.5 in May from 50.4 in April
An official gauge of China’s manufacturing activity unexpectedly slid into contraction in May, snapping a two-month run of growth as market demand shrank sharply, contrasting recent optimism about the economy.
The manufacturing purchasing managers index fell to 49.5 in May from 50.4 in April, the National Bureau of Statistics said Friday. That put the index below the 50 mark that separates growth in activity from contraction.
May’s result also undershot expectations of economists polled by The Wall Street Journal, who had anticipated the print to stay steady at 50.4.
The data comes as policy efforts to stimulate demand and revive the property sector have lifted hopes that China’s economic recovery is solidifying.
Equities markets seemed to shrug off the news, with benchmark indexes in China and Hong Kong gaining Friday morning after opening higher.
May’s surprise drop was largely due to insufficient demand, said Zhao Qinghe, a senior statistician with the statistics bureau. Unfavorable effects from a high base formed earlier this year were also in play, Zhao added.
Friday’s data showed that the subindex tracking production declined to 50.8 in May from 52.9 in April. The new orders gauge fell into contraction in May, slipping to 49.6 from 51.1 in April, while that for new export orders followed suit, dropping to 48.3 from 50.6.
“China cannot depend only on exports to drive its economy. The fiscal policy needs to become more proactive to boost domestic demand,” said Zhiwei Zhang, an economist at Pinpoint Asset Management.
Despite the drop in headline PMI, large manufacturers in China reported a faster expansion in May. However, activity at medium-size companies shrank after growing the prior month, while small companies slid deeper into contraction, official data showed.
China’s nonmanufacturing PMI, which covers service and construction activity, also fell in May but stayed in growth territory. The index declined to 51.1 from 51.2 in April, the statistics bureau said.
The subindex tracking service activity rose to 50.5 in May from 50.3 in April, while the construction subindex fell to 54.4 from 56.3.
The release follows Beijing’s rollout of a suite of measures to bolster the property sector, the downturn of which has dented market confidence and consumer spending.
While there are still doubts about the efficacy of the policy push, authorities’ more supportive stance, coupled with better-than-expected economic growth in the first quarter, have prompted many institutions to upgrade their forecasts for China’s economic growth.
The International Monetary Fund earlier this week upgraded its projection for China’s economic growth this year to 5.0% from 4.6%. The latest forecast is in line with Beijing’s target for this year.
The May PMI prints may send a warning sign for growth, said ING’s Lynn Song, chief economist for Greater China. But it is advisable to not overly rely on survey data, which can be fickle, he said in a note.
“Disappointing data could also increase urgency to expedite policy rollout,” he added.