Chinese factory activity falls in hit to economic momentum

China’s manufacturing activity unexpectedly fell in May, according to an official survey, adding to pressure on policymakers seeking to boost momentum in the world’s second-biggest economy.

The country’s official manufacturing purchasing managers’ index came in at 49.5 in May, missing expectations of an expansion and reversing recent increases in April and March. A reading of above 50 marks an expansion compared with the previous month.

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

Other recent data indicators have pointed towards the effects of that shift, with industrial production in April beating forecasts to rise 6.7 per cent. 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 new orders and overseas orders were in decline.

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

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

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Beijing has maintained a cautious approach towards stimulus since a cash crunch swept through its vast property sector in late 2021. Policymakers have gradually cut benchmark lending rates and emphasised the need to complete unfinished construction projects.

But recent announcements have indicated that the government is stepping up its support. New measures unveiled in mid-May will allow state-owned enterprises to purchase unsold housing and were described in domestic media as a “historic” shift in policy.

Wang said housing “was performing worse than last year” and that there had been “very little” policy support. Recent official data showed new home sales by floor area fell 23.4 per cent year on year in the first quarter.

China has set an economic growth target of 5 per cent for the full year. GDP in the first quarter grew 5.3 per cent compared with early 2023, when Covid-19 outbreaks erupted across the country.

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

Retail sales in April grew just 2.3 per cent year on year, in a further sign of weak consumption that has left consumer price growth in deflationary territory for part of the past year.

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

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

Additional reporting by Wang Xueqiao in Shanghai