June 1, 2016 / 2:06 AM / 3 years ago

China factory slowdown worsens in May, hopes for quick recovery fade - Caixin PMI

BEIJING, June 1 (Reuters) - Activity at China’s factories shrank for a 15th straight month in May as new orders fell, a private survey showed on Wednesday, as hope fades for a quick recovery in the country’s vast manufacturing sector.

The Caixin/Markit Manufacturing Purchasing Managers’ index (PMI) fell to 49.2 last month, below market expectations of 49.3 and April’s reading of 49.4.

While modest, May’s decline marked a reversal after two months of relative improvement, which had sparked hopes that the economy was stabilising. The index has now been below the 50-point neutral level which separates expansion in activity from contraction since March 2015.

Faced with shrinking orders from at home and abroad, manufacturers continued to cut payrolls at a rate similar to February’s multi-year record and reduced their purchases of raw materials and other goods used in production.

Total new orders declined in May for the first time in three months as a slide in export orders accelerated. The new export order index fell to 47.7 in May from 48.6 in April.

China’s factory and industrial performance had shown signs of recovery in March after banks issued a record 4.6 trillion yuan ($698.85 billion) in loans in the first quarter, but the pace of lending slowed in April and recent indications are that authorities are concerned about increasing levels of debt.

However, most analysts believe continued fiscal and monetary support is needed, and media in recent weeks have reported a steady stream of major infrastructure projects as the government talks up its ability to further support growth.

“Overall, China’s economy has not been able to sustain the recovery it had in the first quarter and is in the process of bottoming out,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group said in a note before the PMI report.

“The government still needs to make full use of proactive fiscal policy measures accompanied by a prudent monetary policy to prevent the economy from slowing further.”

After seeing economy growth cool to a 25-year low in 2015, the government has made reducing its industrial capacity glut one of its top priorities, and has vowed to put “zombie” companies out of business. But authorities are treading cautiously as the threat of massive job losses could raise the risk of social instability.

Factory output dipped for a second month in May, although only marginally.

Increases in factory gate prices slowed significantly in May but were still in expansionary territory. Commodities prices rallied this year amid hopes that China’s slowdown was bottoming out, but have since declined as a speculative futures bubble deflated.

Reporting by Elias Glenn; Editing by Kim Coghill; Elias.Glenn@thomsonreuters.com; +86 138 1600 5903; Reuters Messaging: elias.glenn@thomsonreuters.com

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