China’s factory activity shrank in May despite strong exports and supportive policies aimed at boosting domestic demand, indicating an uneven economic recovery. The official manufacturing purchasing managers’ index (PMI) stood at 49.5, according to the National Bureau of Statistics (NBS). The figure fell from 50.4 in April, and fell short of expectations, with Chinese financial service provider Wind having predicted a reading of 50.1. A reading above 50 indicates expansion of activity, while a reading below suggests contraction. The new manufacturing export order subindex, meanwhile, fell to 47.2 in May from 50.6 in April. “The manufacturing PMI dropped below 50. China cannot depend only on exports to drive its economy,” said Zhang Zhiwei, President and Chief Economist at Pinpoint Asset Management. “The fiscal policy needs to become more proactive to boost domestic demand. So far this year the fiscal policy has been muted, with bond issuance behind schedule. The change in policy stance in the property sector is one step in the right direction, but its impact on the economy is likely to be gradual.”
China’s non-manufacturing PMI – a measurement of sentiment in the service and construction sectors – fell to 51.1 in May from 51.2 in April but remained in expansion territory for the fifth straight month. Within the non-manufacturing PMI, the new order subindex within the construction sector fell to 44.1 in May from 45.3 in April, while the service sector business activity subindex fell to 47.4 from 50.3. “The contribution of property policy to the recent PMI expansion is limited due to the modest scale of the policy. Currently, the bright spot in China’s economy remains exports,” said Larry Hu, Chief China Economist at Macquarie Capital. “Activity in China’s industrial sector this year will largely depend on how long demand in overseas economies can be sustained, particularly economic growth in the U.S. market.” Beijing has been pinning its hopes on export-led growth thanks to the fast rebound in overseas demand, and in the face of prolonged sluggish domestic demand, it has introduced various property and trade-in policies to ensure China can meet its “around 5%” GDP growth target.
China has made a vigorous attempt to reverse the ongoing property downturn by further cutting mortgage rates, encouraging destocking and offering CNY300 billion of central bank funds to help local governments buy inventories from developers. Three of China’s four top-tier cities have also launched stimulus measures to revive the housing market, and about 10 provincial cities, including Nanjing, Tianjin and Chengdu, have adjusted their property policies, with measures such as lowering down payment ratios and subsidies for trade-in homes. The new policy is expected to boost China’s GDP growth to around 5.5%, according to Xun Yugen, Chief Economist at Haitong Securities. Before Beijing rolled out the policies, the real estate sector had dragged down GDP by about 0.38 percentage points in the first quarter, the South China Morning Post reports.
China’s economy is expected to achieve a resilient growth of 5% this year, faster than previous projections, but the country still needs to scale up property sector support and monetary easing as downside risks persist, said experts from the International Monetary Fund (IMF). Gita Gopinath, First Deputy Managing Director of the IMF, said in Beijing that the IMF has raised its forecasts for China’s economic growth to 5% this year and 4.5% next year, both up 0.4 percentage point compared with its April projections. Goldman Sachs and Citigroup also raised their forecasts for China’s full-year GDP to 5% following its faster-than-expected growth in the first quarter, the China Daily reports.
