The worrisome slowdown of manufacturing activity in China

Chinese manufacturers indicators published this Friday mark a sharp slowdown in industrial activity in May. A sector that weighs heavily on the Chinese economy.

The Chinese economic activity continues to slow. In the first quarter the asian giant recorded 8.1% GDP growth, its lowest level in nearly three years, bad news continues to fall for the Chinese economy with the manufacturing index released Friday. The PMI purchasing managers published by the China Federation of Logistics and Purchasing (CFLP) indicates a growth in manufacturing activity, as the index appears to 50.4 in May — above the 50 line between growth and contraction, but it marks a sharp decline, losing three points from the previous month, and is below market expectations which estimated it at 51.5, according to Dow Jones Newswires.

HSBC, which also independently calculates its PMI, has announced a far more frightening figure: 48.4 for the month of May, a further contraction. The gap between official figures and those published by HSBC could be explained by an underestimation of the share of SMEs in the Chinese economy, analysts also point out that the large state enterprises were the first to benefit from the stimulus.

To face the economic slowdown, the Chinese government in recent weeks has announced a series of measures to support key sectors such as automobiles and steel. No major stimulus package is expected, however. The manufacturing sector represents nearly 30% of the Chinese GDP and 20% of the value of the global manufacturing industry which marks the importance of PMI released on Friday.

New orders in the manufacturing industry have contracted slightly to 49.8, down 4.7 percentage points over one month, according to the CFLP. “The sharp decline in the PMI in May shows that the economy is close to a halt,” responded Alistair Thornton, economist at IHS Global Insight, based in Beijing, noting that the decline of 2.9 points percentage in a month is the highest since mid-2010.

The Chinese government, which forecasts growth of 7.5% in 2012 against 8% in previous years, might find itself forced to make further efforts easing. The index for the month of May “confirms a continued deceleration in the manufacturing sector due to weakening demand, both foreign markets and in China,” said Qu Hongbin, chief economist at HSBC China. He therefore expects further declines in bank reserve requirements over the coming months, and a decrease of 25 basis points in interest rates. He also believes that “policy makers in Beijing should allow measures (stimulus) budget and private investment to play a greater role to support growth.”

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