China factory activity shrinks in surprise hit to growth outlook

BEIJING – China’s factory activity unexpectedly contracted in May, a warning sign from the area of the economy that Beijing is most reliant on to drive growth.

The official manufacturing purchasing managers’ index (PMI) fell to 49.5 in May, the National Bureau of Statistics (NBS) said on May 31. This compares with a reading of 50.4 in April and a forecast of 50.5 in Bloomberg’s economist survey. Any number above 50 points to an expansion.

The reversal in manufacturing, after two months of gains, flags a threat to China’s economic growth target of around 5 per cent in 2024. The country’s export-oriented industries are expected to play a crucial role in hitting that target, with consumption at home still weighed down by a real estate slump.

There is an additional risk in the pipeline for Chinese manufacturers

as tensions with trade partners escalate

.

The US and European Union – two of China’s biggest export markets – accuse Beijing of building excess capacity in its industries.

They are erecting new trade barriers that will hold back sales of key products, like electric vehicles (EVs), and threatening even more.

“The manufacturing-driven recovery remains vulnerable,” said ANZ Greater China chief economist Raymond Yeung. “In the next few months, rising trade protectionism will be a major headwind.”

The Biden administration recently imposed a 100 per cent tariff on Chinese EVs, as well as other charges on a variety of imports including metals.

The EU is expected to announce EV tariffs in the coming weeks and is investigating Chinese subsidies in other areas.

China’s exports posted solid growth in the first four months of 2024. But the PMI sub-index for new export orders contracted in May for the first time in three months. A measure of input prices has climbed to the highest in eight months, reflecting a pickup in commodity costs.

In a statement accompanying the data release, NBS analyst Zhao Qinghe pointed to “a high base of comparison led by previous fast expansion in the industry” and “insufficient effective demand” as reasons for the slowdown.

The non-manufacturing measure of activity in construction and services came in at 51.1, NBS said. This compares with a forecast of 51.5 and an April reading of 51.2.

The sub-gauge of construction activity fell to 54.4 from 56.3. This slowdown came after a strong rebound in April, said Jones Lang LaSalle Greater China chief economist Bruce Pang.

Demand in the industry will likely improve in the coming months, he said, with a pickup in sales of special local bonds – which are mainly used to fund infrastructure investment – as well as government-guided financial support for real estate developers to complete and deliver housing projects. BLOOMBERG