China's May factory activity returns to growth but demand remains weak: Caixin PMI

BEIJING (Reuters) - China’s factory activity unexpectedly returned to growth in May as strict measures to contain the coronavirus outbreak were eased, but the improvement was marginal as export orders continued to shrink, a private business survey showed on Monday.

An employee works on a production line manufacturing steel structures at a factory in Huzhou, Zhejiang province, China May 17, 2020. Picture taken May 17, 2020. China Daily via REUTERS

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 last month, from April’s contractionary 49.4. The 50-mark separates growth from contraction on a monthly basis. Analysts polled by Reuters had expected a reading of 49.6.

Though modest, May’s reading was the highest since January, driven by a sharp increase in output as companies got back to work and cleared outstanding orders. Supply chains also steadied after massive disruptions early in the year.

But demand remained subdued. With many of China’s trading partners deep in lockdowns of their own, new export orders remained firmly in contractionary territory, although the drop was not as sharp as in April. Consumers have also remained cautious amid job losses and fears or a fresh wave of infections.

Although much of China’s economy has reopened and the outbreak appears to have been contained, many manufacturers are struggling with reduced or cancelled overseas orders as global demand falters.

Factories also continued to cut payrolls, but the pace of job shedding eased. Avoiding mass unemployment is a top government priority, with a target to create over 9 million urban jobs this year.

“Sluggish exports remained a big drag on demand as the virus continued spreading overseas,” said Wang Zhe, senior economist at Caixin Insight Group.

“Stabilizing the job market is a top priority on policymakers’ agenda this year, as shown in last month’s government work report. Boosting employment is not an easy task, as the employment subindex in the Caixin manufacturing PMI survey has remained in contractionary territory for five months in a row,” Wang said.

An official survey on Sunday showed China’s factory activity grew at a slower pace in May but momentum in the services and construction sectors quickened, pointing to an uneven recovery.

The economy shrank 6.8% in the first quarter from a year earlier, the first contraction since quarterly records began, and analysts believe it will be months before broader activity returns to pre-crisis levels .

Highlighting the uncertain outlook, the government said in late May it was not setting an annual growth target, for the first time since 2002.

Beijing also announced additional fiscal measures to bolster the economy, equal to about 4.1% of China’s gross domestic product (GDP), according to Reuters calculations.

China has cut the amount of cash banks must hold as reserves and repeatedly lowered some of its key interest rates to reduce borrowing costs for companies, while allowing smaller firms to postpone loan repayments.

Reporting by Gabriel Crossley; Editing by Kim Coghill