China factory activity shrinks, adds to growth fears

BEIJING Mon Jun 3, 2013 1:28am EDT

Employees work inside a factory which makes bearing cages in Liaocheng, Shandong province May 24, 2013. REUTERS/Stringer

Employees work inside a factory which makes bearing cages in Liaocheng, Shandong province May 24, 2013.

Credit: Reuters/Stringer

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BEIJING (Reuters) - China's factory activity shrank for the first time in seven months in May and growth in the services sector cooled, evidence that the world's second-largest economy is losing further momentum in the second quarter.

The HSBC/Markit Purchasing Managers' Index (PMI) for May dropped to 49.2, the lowest level since October 2012 and down from 50.4 in April, as domestic and overseas demand fell.

The figure was slightly lower than a preliminary reading of 49.6 released on May 23. Fifty divides expansion from contraction compared with the month before.

China's economic growth surprised financial markets by weakening in the first quarter and that trend may not have changed, said Zhiwei Zhang, chief China economist at Nomura in Hong Kong.

"We think China's economic growth will probably continue to slide," he said. "Our forecast of GDP growth in Q2 is to slow to 7.5 percent from 7.7 percent in Q1."

The MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS gave up as much as 0.2 percent to hit its lowest level in nearly seven weeks after the data, while Australian shares .AXJO dipped before stabilizing.

Hong Kong .HSI and Shanghai shares both lost some gains to stand up 0.4 percent and 0.1 percent, respectively.

"The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions," said Qu Hongbin, chief China economist at HSBC.

In the HSBC manufacturing PMI, compiled by UK-based Markit Group Ltd, the sub-index for total new orders dipped to 48.7, the first time it has retreated below 50 since last September and the new export orders sub index was below 50 for the second consecutive month.

The indexes suggested falling demand from both domestic and overseas firms.

China's official manufacturing PMI, released on Saturday, rose but remained close to 50. It ticked up to 50.8 in May from April's 50.6, although it also pointed to falling orders from export markets.

The Chinese government's official PMI for the non-manufacturing sector, released earlier on Monday, also pointed to a loss of growth. It fell to 54.3 in May from 54.5 in April, the lowest since September last year.

MOMENTUM ELUSIVE

The figures add to evidence China's economy is struggling for momentum, buffeted by weak exports demand and overcapacity in some industrial sectors.

The government is also attempting to rein in credit growth, a lot of which is not finding its way into productive investment but into speculative areas such as property.

The IMF and OECD last week cut their forecasts for 2013 economic growth to 7.75 percent and 7.8 percent, respectively.

China's annual economic growth slowed to 7.7 percent in the first quarter from 7.9 percent in the previous quarter. The full-year annual growth of 7.8 percent in 2012 was the weakest since 1999.

The IMF's cut brings it into line with recent revisions by private institutions, including Bank of America-Merrill Lynch, which pared its forecast this month to 7.6 percent from 8 percent, and Standard Chartered, which cut its estimate to 7.7 percent from 8.3 percent.

ING last month reduced its prediction to 7.8 percent from 9 percent.

Despite the slowdown, most economists believe Beijing will refrain from big-bang stimulus as long as the labor market holds up, since employment is crucial for social stability. Both the official PMI and the HSBC PMI show employment is falling.

The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing room to deliver reforms to the economy to reduce its reliance on exports.

While some economists believe that Beijing may miss its 7.5 percent growth target this year, China's leaders appear to be comfortable for now with a moderation in economic growth.

Premier Li Keqiang said last month the country has limited room to rely on government spending or policy stimulus to spur its growth.

The official PMIs focus on bigger and state-owned firms, while the HSBC/Markit series covers more smaller private enterprises.

"Big manufacturers are supported by state-led investment while smaller firms are more exposed to the volatile export market," said You Hongye, an economist at China Essence Securities in Beijing.

"We still cannot see any signs of recovery but the chances of any sharp slowdown are also small."

(Additional reporting by Kevin Yao; Editing by Neil Fullick)

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Comments (2)
SanPa wrote:
Further evidence that the Obama Administration has been on the wrong path regarding job creation. Romney would have been a better catalyst for economic growth.

Jun 03, 2013 2:15am EDT  --  Report as abuse
MikeBarnett wrote:
China’s official numbers include more PMI data from the center, west, and north that develop under the 5 year plans from 2011 to 2020. They show growth indices of 54.3, down from 54.5, with a subindex for construction falling from 62.4 to 62.2. Infrastructure projects are a major part of the 5 year plans. Although they are declining numbers for one month, they represent all of China instead of a focus on areas in international trade zones near the south and east coasts. People appear to forget that China is bigger than the continental US with Alaska, so regional differences exist.

In addition, the EU, China’s biggest trade partner, remains in recession, and the US, China’s 2nd biggest trade partner, continues to struggle with a GDP growth rate nearly one fourth that of China. If China’s GDP growth reaches down to 7.5% for 2013, it will remain 3.75 times that of the US. Further, China has been expanding trade with third world countries, and President Xi Jinping has been visiting or meeting the leaders of Fiji, Trinidad and Tobago, Antigua and Barbuda, Barbados, the Bahamas, Dominica, Grenada, Guyana, Suriname, Jamaica, Costa Rica, and Mexico prior to his meeting with President Obama in California. The leaders of some of the world’s smallest countries will meet and have their photographs taken with the second most powerful man in the world. Trade agreements are being signed, and China’s trade with small countries grows by double digits each year and by triple digits every five years. Small countries may be small, but 150 small countries can help make up for declines in the EU and US. These visits will have positive impacts for China on future PMI’s, but US leaders usually ignore these small nations.

Jun 03, 2013 4:51pm EDT  --  Report as abuse
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