Chinese factory activity contracts as economic recovery stumbles

China’s factory activity has contracted for a second consecutive month, while growth in the service sector slowed, adding to signs of a slackening post-pandemic recovery in the world’s second-largest economy.

The official manufacturing purchasing managers’ index came in at 48.8 for May, compared with 49.2 in April, according to the National Bureau of Statistics.

The non-manufacturing PMI, which covers activity in the service sector and industries such as construction, was 54.5 in May, below the previous month’s figure of 56.4.

Economists said several months of manufacturing readings below 50, which indicates a contraction, would lead the government to consider stimulus policies to support the economy, which has struggled to maintain strong growth after Beijing relaxed draconian zero-Covid controls this year. Exports have also lagged, as global demand for Chinese goods has failed to pick up.

“We expected that the initial rebound would be led by consumption and services post-reopening and that optimism would eventually translate into a broadening of the base of this economic recovery to include stronger manufacturing and investment,” said Carlos Casanova, senior economist for Asia at UBP. “That broadening has not taken place yet.”

The weaker data sent regional currencies lower against the dollar on Wednesday and hit equity markets that were already weighed down by concerns about China’s uneven economic rebound. One index of Chinese stocks listed in Hong Kong slipped to bear market territory.

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China’s economy grew rapidly in the first quarter, but the rebound has begun to falter in the past two months. Property investment, credit and industrial profits have declined, while indicators such as retail sales have fallen short of analysts’ expectations, casting doubt on the government’s modest full-year growth target of 5 per cent.

“The foundation for recovery and development still needs to be consolidated,” said Zhao Qinghe, a senior statistician at the NBS, in a statement on Wednesday. In the manufacturing sector, he said, “production and demand slowed distinctly”.

Hong Kong’s Hang Seng China Enterprises index, which tracks large mainland Chinese companies, fell more than 2 per cent on Wednesday, bringing the benchmark more than 20 per cent below its recent peak in January and plunging it into a bear market. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 1.2 per cent.

The renminbi slipped 0.4 per cent to Rmb7.1051 against the dollar, bringing it down almost 3 per cent for the year to date. Currencies of large exporters to China also sold off, with the Australian and New Zealand dollars down 0.5 per cent and 0.4 per cent, respectively, against the greenback.

A sub-index of new export orders declined to 47.2 in May from 47.6 in April, “pointing to weaker external demand”, Goldman Sachs said in a research note. The bank said deflationary pressures on the manufacturing sector were “partly due to falling commodities prices and muted market demand”.

The data indicated a strong expansion in service industries such as airlines, ship and road transport services and telecommunications but sustained weakness in property.

“There’s this widening discrepancy between the service part and the manufacturing side,” said UBP’s Casanova, adding that “the economic recovery has been exceptionally uneven”.

However, pent-up demand for services following the end of the Covid-19 controls would fade in the coming months, he said, making the outlook for economic growth this quarter and next “a bit more complicated than we thought at the beginning of the year”.

Reporting by William Langley, Andy Lin and Hudson Lockett in Hong Kong, Joe Leahy in Beijing and Thomas Hale in Shanghai