China May flash HSBC factory PMI contracts for third month

[BEIJING] Chinese factory activity contracted for a third month in May and output shrank at the fastest rate in just over a year, a private survey showed, indicating persistent weakness in the world's second-largest economy that requires increased policy support.

The flash HSBC/Markit Purchasing Managers' Index (PMI) fell to 49.1 in May, below the 50-point level that separates growth in activity from a contraction on a monthly basis.

Economists polled by Reuters had forecast a reading of 49.3, slightly stronger than April's final 48.9.

After a brief rebound in February, the index has now been back in negative territory for three consecutive months.

The sub-index on new export orders fell to a 23-month low of 46.8 in May, while overall new orders shrank for the third straight month, albeit at a slower pace.

The output sub-index contracted for the first time this year in May, retreating to a 13-month low of 48.4, while the employment sub-index showed manufacturers shed jobs for the 19th month in a row.

"Softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions," said Annabel Fiddes, an economist at Markit.

"On a positive note, deflationary pressures remained relatively strong, with both input and output prices continuing to decline, leaving plenty of scope for the authorities to implement further stimulus measures if required."

China's economic growth slowed to a six-year-low of 7 per cent in the first quarter, weighed down by a weakening property sector and softening domestic and export demand, which is leaving more and more factory capacity standing idle.

Recent data showed a further loss of momentum heading into the second quarter, with investment growth in Janaury-April falling to its lowest in nearly 15 years.

That increases the risks that the government will not meet its full-year growth target of around 7 per cent, even with additional stimulus measures.

The central bank has cut interest rates three times since November, on top of reductions in banks' required reserve ratios and injections of short-term liquidity to spur bank lending and lower borrowing costs.

The government has also been quickening spending to spur infrastructure investment, after policy insiders told Reuters that in addition to further monetary easing, the government may resort to fiscal stimulus.

REUTERS