China Factory Activity Still Weak

An initial gauge of China's factory activity showed further sluggishness in May, though economists said government efforts to reinvigorate the economy appear to be cushioning the downward slide.

The HSBC preliminary manufacturing Purchasing Managers Index rose slightly to 49.1 for May, from a final reading of 48.9 in April, HSBC Holdings PLC said Thursday. The level remains below the 50 threshold that separates expansion from contraction.

More ominously, the subindex measuring factory output was its weakest in 13 months. Readings for new orders, new export orders, employment and inventories also looked anemic.

The May results point to a further deterioration in operating conditions, said Annabel Fiddes, economist at Markit Economics, which compiles the index with HSBC. "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," she said.

In the first quarter, economic growth was 7% from a year earlier, the worst performance in six years. China's policy makers have been trying an array of measures to keep growth from slipping too quickly.

Beijing has cut interest rates three times since November and allowed banks to lend out more of their deposits by cutting their reserve requirements. Authorities have also offered tax breaks, cut red tape, made targeted infrastructure spending, and instructed banks to lend to local government-backed companies— a reversal of policies put in place last year to head off concerns over potential repayment problems.

These support measures appear to be cushioning a drop in prices as economic growth slows, economists said. "There is less downward pressure on prices," said Nomura economist Zhao Yang. Still, on the downside, he said, "There is still destocking going on and exports are weak."

The preliminary PMI figure, also called the HSBC Flash China PMI, is based on 85% to 90% of total responses to HSBC's survey each month, and is issued about one week before the final PMI reading.

Liyan Qi

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