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China factory activity contracts in May
Aggregated Source: Shanghai Daily: Business

CHINA'S manufacturing activity may contract for the first time in seven months in May due to weaker demand at both home and abroad, a survey showed today.

It further indicates that the recovery of the world's second-largest economy is more fragile than expected and may prompt policy changes.

The HSBC Flash China Manufacturing Purchasing Managers' Index, the earliest available indicator of the sector's vitality, retreated to 49.6 in May from April's final reading of 50.4. A reading below 50 means contraction.

May is likely to end a six-month trend with the index, which is slanted towards private and export-oriented firms, staying in the expansionary territory.

Qu Hongbin, chief economist for China and co-head of Asian Economic Research at HSBC Holdings Plc, said the manufacturing activity is cooling in China.

"It reflects slower domestic demand and ongoing external headwinds," Qu said. "A sequential slowdown is likely in the middle of the second quarter, casting downside risk to China's fragile growth recovery."

Qu called for more policy support because the labor market also showed more slackness and the country has room to ease fiscal policies.

The component indices showed that new orders, backlogs of work and quantity of purchases all decreased to a level below 50, changing growth direction and pointing to contraction. Only indices of output and stocks of finished goods kept rising but at a slower rate.

China's weaker-than-expected economic growth, which slowed to 7.7 percent in the first three months from 7.9 percent in the last quarter of 2012, has triggered calls for policy easing, now that inflation has dropped in recent months.

Nomura predicted that China's economic growth will slow to a rate of 7.5 percent in the rest of the year, 7.4 percent and 7.2 percent in the following three quarters.

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