Shrinking China factory activity, faltering exports inflame economic anxiety

BEIJING (Reuters) - China’s factory activity in May slumped into a deeper contraction than markets had expected, heaping pressure on Beijing to roll out more stimulus to support an economy hit hard by a bruising trade war with the United States.

FILE PHOTO: Employees work on the production line at a factory of automotive engine manufacturer Power Xinchen in Mianyang, Sichuan province, China March 28, 2019. REUTERS/Stringer

Friday’s weak manufacturing readings, which follow a recent raft of soft data across the retail, export and construction sectors, could inflame concerns about the risk of a global recession and push more central banks to adopt an accommodative monetary stance.

The official Purchasing Managers’ Index (PMI) fell to 49.4 in May from 50.1 in April, data from the statistics bureau showed. Analysts surveyed by Reuters had forecast the PMI to be down a notch at 49.9, below the 50-point mark separates expansion from contraction on a monthly basis.

Factory output expanded at a slower pace as new orders - a gauge of domestic and foreign demand - fell for the first time in four months. Export orders extended their decline for the twelfth straight month with the sub-index pulling back significantly to 46.5 from April’s 49.2, suggesting a further weakening in global demand.

“Export orders dropped back particularly sharply, which suggests that Trump’s latest tariff hike may already be undermining foreign demand,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

While China’s exporters are feeling the pinch, Friday’s data showed import orders also contracted at a quicker pace, reflecting softening demand at home despite a flurry of growth-supporting measures that were rolled out earlier this year.

Some economists believe more stimulus is needed, likely through further cuts in the amount of cash banks hold as reserves and fiscal spending.

The downbeat data reflects insufficient demand that has become a “more prominent problem” and adds urgency for the government to intervene, Zhang Liqun, an analyst with the China Federation of Logistics and Purchasing (CFLP), said in a note.

Central bank governor Yi Gang, however, has suggested the room for further monetary easing had become more limited, while economists also expressed concerns about rising debt risks.

Zhang said that Beijing should focus on boosting domestic demand and improving “the ability to cope with fluctuations in external demand as soon as possible.”

Earlier this month, the People’s Bank of China (PBOC) announced a cut in three phases in the reserve requirement ratio for regional banks to reduce small companies’ financing costs. The PBOC has already delivered five RRR cuts since early 2018, lowering the ratio to 13.5 percent for big banks and 11.5 percent for small-to medium-sized lenders.

Beijing has also ramped up fiscal stimulus this year, unveiling tax and fee cuts amounting to 2 trillion yuan ($297 billion) to ease burdens on firms, while allowing local governments to issue 2.15 trillion yuan of special bonds to fund infrastructure projects.

Many China observers have cautioned it will take time for those measures to fully kick in, with most not expecting the economy to convincingly stabilize until around mid-year.

Global markets, led by equities and currencies, stuttered as the weak Chinese data and Washington’s shock decision to impose tariffs on all Mexican imports rattled investors.


Trade tensions between Washington and Beijing escalated sharply earlier this month after the Trump administration accused China of having “reneged” on its previous promises to make structural changes to its economic practices.

Washington later slapped additional tariffs of up to 25% on $200 billion of Chinese goods, prompting Beijing to retaliate.

The tariff standoff has already taken a toll on global growth, trade and business investment. Further inflaming tensions between the economic giants, the Trump administration blacklisted Huawei Technologies Co Ltd, the world’s second-largest seller of smartphones, a blow that has rippled through global supply chains and battered technology shares.

Both sides appeared to be digging in as President Donald Trump threatens to increase taxes on all China imports while Beijing ramped up its criticism against Washington, saying provoking trade disputes is “naked economic terrorism”.

On Friday, former Chinese central bank governor Dai Xianglong said he expected no major breakthrough over trade at an anticipated meeting between Chinese and U.S. leaders in Japan at the end of June.

China’s exports unexpectedly fell in April on a sharp drop in shipments to the United States, while industrial output and retail sales also showed surprisingly weak growth last month. Data this week showed profits for industrial firms also contracted in April.

On the brighter side, despite the pronounced weakness in the manufacturing sector, China’s services industry showed solid expansion. Another survey released by the statistics bureau on Friday showed the official non-manufacturing Purchasing Managers’ Index (PMI) held steady at 54.3 in May, unchanged from April.

Services account for more than half of China’s economy, and rising wages have increased Chinese consumers’ spending power. But the sector softened late last year along with a slowdown in the broader economy.

The official May composite PMI, which covers both manufacturing and services activity, slipped to 53.3 from April’s 53.4.

Some analysts also worry the standoff with the United States could morph into a technology war and put more strain on China’s manufacturing sector.

“Our concern is not just on products affected by the tariffs, which we believe could have a longer impact on both the Chinese and U.S. economy unless trade negotiations resume,” wrote Iris Pang, Greater China Economist for ING bank.

“We also worry about technology companies’ production. The technology war is brewing even faster in May 2019, and could continue for the rest of the year.”

Reporting by Yawen Chen and Ryan Woo; Editing by Shri Navaratnam