Vendors browse their smartphones as they wait for customers at their store selling Chinese made souvenirs at the Wangfujing shopping district in Beijing
Manufacturing in China shrank for the third straight month in May as demand remained soft, raising the chances of more stimulus to prop up growth in the world’s No. 2 economy.
HSBC’s preliminary manufacturing index, based on a monthly survey of factory purchasing managers, came in at 49.1 for May. That’s slightly better than 48.9 in April but still in contractionary territory on the 100-point index. Numbers above 50 indicate expansion.
The report released yesterday said that factory production fell to its lowest level in 13 months, after holding steady last month.
New export orders also declined, swinging from an increase in April, although overall new orders contracted at a slower rate.
Softer domestic and overseas demand and factory job cuts indicate that China’s outsize manufacturing industry, which employs many millions of people, “may find it difficult to expand at least in the near term,” said Annabel Fiddes, an economist at Markit, which conducted the survey.
Companies are tempering production plans in line with weaker demand, she said.
The latest numbers raise expectations that policymakers in Beijing will roll out further measures to shore up growth in China’s economy, which expanded at its slowest quarterly pace in six years in the first quarter.
China has already cut interest rates three times in six months and slashed the bank reserve requirement ratio in April as the government tries to meet its 7 percent growth target for the year.
Strong deflationary pressures, as seen in falling prices for both raw materials and finished goods, “leave plenty of scope” for further stimulus, Fiddes said.
Policy makers are considering relaxing rules for bond sales in a bid to boost growth, while banks have been instructed to keep funding projects that were approved before year-end 2014, even if borrowers can’t make repayments.
“Overall growth remains weak, but we do see some tentative signs of improvement,” Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong, said in an e-mail. “The loosening fiscal policy will lead to rapid growth of infrastructure building and thus partially offset the slowdown in property investment and other investment, improving short- term growth momentum.”
Premier Li Keqiang’s government is balancing structural reforms including new fiscal arrangements and moves to open the nation’s capital account with the need to keep economic growth ticking along rapidly enough to sustain employment.
“Despite the strong desire from policy makers to accelerate China’s structural reforms, stimulus to reverse the economic downturn is the priority for now,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. In Hong Kong, wrote in a note Wednesday. “Taking more concrete steps will be difficult until the economy stabilizes.” AP/Bloomberg
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