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Fears grow over recovery as China factory activity shrinks
Aggregated Source: Shanghai Daily: Business

CHINA'S manufacturing activity contracted for the first time in seven months in May as demand both at home and abroad fell, a survey showed yesterday.

It reinforced fears that recovery in the world's second-largest economy has been weaker than expected, and may prompt policy changes.

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

A reading below 50 means contraction, and May is likely to end a six-month stream that the index, which is slanted toward private and export-oriented firms, points to expansion.

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 slackness and the country had room to ease fiscal policies.

The component indices showed that new orders, backlogs of work and quantity of purchases all fell below 50, changing growth direction and pointing to contraction.

Only indices of output and stocks of finished goods edged up, but at a slower rate as well.

Yao Wei, China economist at Societe Generale, said the Flash HSBC PMI continued to disappoint, effectively dashing hopes of a growth recovery in the current quarter.

"In light of this report, we expect the official manufacturing PMI to follow suit and tank below the boom-bust line to 49.9," Yao said.

"As the central government is likely to remain cautious, we will continue to remain bearish in terms of economic growth."

The official Purchasing Managers' Index, which weighs toward state-owned industrial companies, fell to 50.6 in April from March's 50.9.

China's weaker-than-expected economic growth, which slowed to 7.7 percent in the first three months from 7.9 percent in the final quarter of last year, has triggered calls for the tightening policies to be lifted, especially as inflation has eased in recent months.

Nomura has projected China's economic growth in the second quarter at 7.5 percent and at 7.4 percent and 7.2 percent in the next two quarters.

But Zhang Zhiwei, an economist at Nomura, said China is unlikely to loosen its monetary policy because the indicators were just weaker instead of collapsing.

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