GROWING RISK OF ‘DOWNWARD SPIRAL’ IN MANUFACTURING
Weak demand blamed for further contraction of factory activity, dealing blow to recovery hopes
The risk of a “downward spiral” in China’s manufacturing sector is becoming a real possibility, analysts say, with weak demand “the culprit” for factory activity contracting further in May to the lowest level since the end of last year.
The official manufacturing purchasing managers’ index (PMI) fell to 48.8, down from 49.2 in April, the National Bureau of Statistics (NBS) announced yesterday, its lowest level since dropping to 47 in December. The 50-mark separates growth from contraction.
Within the official manufacturing PMI, the new-orders subindex fell to 48.3 from 48.8 in April, while the subindex for new export orders fell to 47.2 from 47.6.
The official non-manufacturing PMI, which measures business sentiment in the services and construction sectors, continued to grow but expanded at the slowest pace in four months after falling to 54.5 from 56.4 in April.
“The official PMIs disappointed the markets again in May. The sharper contraction in the manufacturing PMI suggests that the risk of a downward spiral, especially in the manufacturing sector, is becoming more real,” said analysts from Japanese investment bank Nomura.
“The resilient non-manufacturing PMI was mainly backstopped by a burst of suppressed demand for travel and gathering during the first post-Covid ‘golden week’ holiday, while the PMI for the construction sector dropped sharply on weak demand.”
Domestic tourism revenue had jumped to 101 per cent of pre-pandemic levels, reaching 148 billion yuan (HK$163 billion), during the five-day holiday from late April to early May. Nomura’s analysts, though, pointed to a “broad-based” decline in the manufacturing PMI in May.
“We expect the manufacturing PMI to remain in the contraction zone in June, mainly weighed on by strong headwinds from a structural property slump, a deepening global manufacturing downturn and worsening geopolitical tensions,” they added.
China’s economic recovery has already been hit by rising youth unemployment, as well as disappointing retail sales and industrial production, prompting Nomura to cut its full-year economic growth estimate for the country from 5.9 to 5.5 per cent.
The official composite PMI, which includes both manufacturing and services activity, also fell to 52.9 in May, from 54.4 in April.
“China’s economic-prosperity level has receded, and the foundation for recovery and development still needs to be consolidated,” NBS senior statistician Zhao Qinghe said.
Beijing has pledged to shore up trade to support the overall recovery, but exports have struggled due to weak global demand.
And while exports rose by 8.5 per cent in April compared with a year earlier, they grew at a slower pace, and analysts have predicted that overseas shipments are set to struggle further.
“The official PMIs suggest that China’s economic recovery was still ongoing in May, albeit at a slower pace,” said analysts at Capital Economics.
“Industry is struggling, and fiscal support for construction waning. But the service sector is still seeing decent gains, suggesting that [second-quarter gross domestic product] growth may not be as bad as many fear.
“Weakness in demand was the main culprit [for the manufacturing PMI declining] ... Softer demand is resulting in greater slack in supply chains [as] supplier delivery times continued to shorten, while [the] backlog of orders reduced further.”
As unemployment within the 16-24 age group hit a record high in April, retail sales rose by 18.4 per cent, year on year, but this was largely caused by a low comparison base after the figure had dropped by 11.1 per cent in April last year.
“China’s manufacturing PMI dropped further, which indicates the economic recovery faces challenges,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
“Domestic demand weakened recently, partly due to the cooling property market and the second wave of Covid. External demand is not supportive, either, as the US faces the risk of recession.
“The sentiment in the financial market is quite bearish. It is not clear how the government interprets the current economic conditions. There is no sign of an imminent policy response. The government may continue to take a ‘wait-and-see’ stance for now.”