Chinese factory activity falls affected by economic boost

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China’s manufacturing activity unexpectedly fell in May, an official survey showed, increasing pressure on authorities seeking to boost momentum in the world’s second-largest economy.

The country’s official manufacturing purchasing managers’ index hit 49.5 in May, missing expectations for an expansion and reversing recent gains in April and March. A reading above 50 marks an expansion compared to the previous month.

President Xi Jinping’s government has emphasized high-end manufacturing and an improved industrial sector at a time when a prolonged real estate slowdown and weak consumer demand have weighed on economic momentum.

Other recent data indicators have pointed to the effects of that shift: Industrial production in April beat forecasts and rose 6.7 percent. Exports also returned to growth in the same month amid growing international scrutiny of China’s industrial strategy and its impact on global trade.

The non-manufacturing PMI came in at 51.1 in May, still in growth territory, but down from a reading of 51.2 in April. The manufacturing PMI was previously in contractionary territory from October to February. In May, it showed that new orders and overseas orders were declining.

“Most of the demand in the industry is still in the domestic market and is quite weak,” said Dan Wang, chief economist at Hang Seng Bank China.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said China “cannot rely on exports alone to boost its economy” and that fiscal policy “must become more proactive to boost domestic demand.”

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Beijing has maintained a cautious approach to stimulus since a liquidity crunch hit its vast real estate sector in late 2021. Authorities have gradually cut benchmark lending rates and emphasized the need to complete construction projects. unfinished

But recent announcements have indicated that the government is increasing its support. The new measures unveiled in mid-May will allow state-owned companies to buy unsold homes and were described in national media as a “historic” policy change.

Wang said housing “was performing worse than last year” and there had been “very little” political support. Recent official data showed that new home sales by square footage fell 23.4 percent year-on-year in the first quarter.

China has set a full-year economic growth target of 5 percent. GDP in the first quarter grew by 5.3 percent compared to the beginning of 2023, when Covid-19 outbreaks broke out across the country.

This week, the IMF upgraded China’s growth forecast but warned that the country needed to boost domestic demand and “reduce” its industrial policies.

Retail sales in April grew just 2.3 percent year-on-year, in a further sign of weak consumption that has left consumer price growth in deflationary territory for part of last year.

Lynn Song, chief China economist at ING, noted that while survey data “can be fickle,” PMI “disappointments may send a warning signal for growth.”

“This is especially the case because industrial activity has been the main source of strength in the first four months of the year,” he added.

Additional reporting by Wang Xueqiao in Shanghai

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