China’s Factory Slump Worsens as Fears Mount Over Recovery
China’s manufacturing activity contracted for a second straight month in May, providing more evidence the post-Covid recovery in the world’s second-largest economy has slowed.
(Bloomberg) -- China’s economic recovery weakened in May as manufacturing activity continued to slump, prompting investors to dump stocks and call for more stimulus measures to boost growth.
The official manufacturing purchasing managers’ index fell to 48.8, the National Bureau of Statistics said Wednesday, the lowest reading since December 2022 and weaker than the median estimate of 49.5 in a Bloomberg survey of economists. A reading below 50 signals contraction from the previous month.
A non-manufacturing gauge of activity in the services and construction sectors slid to 54.5 from 56.4 in the previous month, also below expectations.
The data confirms the economy’s recovery cooled in the second quarter after a burst of consumer activity early in the year. Calls are getting louder for more stimulus measures, such as interest rate cuts, as investors turn more bearish about the growth outlook. Exports remain weak, a rebound in the property market has faded and businesses are being hit by falling profits.
“This adds to indicators since April that suggest that the economic recovery momentum has continued to slow,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “There’ll be pressure for monetary policy support to be stepped up given the weak domestic inflation.”
Financial markets have been roiled by China’s faltering recovery. A gauge of the nation’s equities listed in Hong Kong slid as much as 2% on Wednesday to be the worst performer in the region. The offshore yuan weakened 0.38% to 7.1182 against the dollar as of 10:10 a.m. local time, extending its loss in May to 2.7%, the most in three months.
Copper futures in London slid, leaving the metal poised for its worst monthly loss in nearly a year. The sharp contraction in China’s steel PMI, which recorded a reading of just 35.2 — the lowest since July 2022 — saw iron ore in Singapore drop as much as 3.3%, taking the steelmaking staple further below $100 a ton.
The slower expansion in the services sector — with the index dropping to 53.8 this month from 55.1 in April — is another worrying sign, since it’s been the main driver of the economy’s recovery this year as well as a key job provider, particularly for the young.
The new orders sub-index for services was below 50, “implying a gap on the demand side,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. Slower growth would put pressure on youth unemployment, which is already at record-high levels, he said.
What Bloomberg Economics Says ...
The weak data underline a lack of confidence in the private sector, and strengthen the case for further policy easing, particularly on the monetary side.
- Chang Shu, chief Asia economist
Read the full report here.
Economists have trimmed their growth forecasts for the year to 5.5%, which is higher than the government’s fairly conservative target of around 5%. While many expect the central bank could still ease policy this year — including cutting the reserve requirement ratio for banks or reducing interest rates — officials are reluctant to take aggressive measures.
“There were a lot of pledges on supporting the economy earlier in the year, but none of that is coming to fruition, which is what is most frustrating to me,” said Yang Zhiyong, executive director of Beijing Gemchart Asset Management Co.
Chinese state media on Wednesday cited analysts saying more pro-growth policy measures may be on the cards, including interest rate cuts and more bond sales.
Beijing is likely to take targeted steps to boost the economy. Officials are considering new tax incentives worth hundreds of billions of yuan for high-end manufacturing companies, according to a person familiar with the discussions.
“It is not clear how the government interprets the current economic condition,” said Zhiwei Zhang, chief economist of Pinpoint Asset Management. “There is no sign of imminent policy response. The government may continue to take a “wait and see” stance for now.”
--With assistance from Chester Yung, Shikhar Balwani, April Ma and Jason Rogers.
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