China factory activity shrinks, adds to growth fears

By Xiaoyi Shao and Jonathan Standing

BEIJING (Reuters) - China's factory activity shrank for the first time in seven months in May and growth in the services sector cooled, evidence that the world's second-largest economy is losing further momentum in the second quarter.
The HSBC/Markit Purchasing Managers' Index (PMI) for May dropped to 49.2, the lowest level since October 2012 and down from 50.4 in April, as domestic and overseas demand fell.
The figure was slightly lower than a preliminary reading of 49.6 released on May 23. Fifty divides expansion from contraction compared with the month before.
China's economic growth surprised financial markets by weakening in the first quarter and that trend may not have changed, said Zhiwei Zhang, chief China economist at Nomura in Hong Kong.
"We think China's economic growth will probably continue to slide," he said. "Our forecast of GDP growth in Q2 is to slow to 7.5 percent from 7.7 percent in Q1."
The MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> gave up as much as 0.2 percent to hit its lowest level in nearly seven weeks after the data, while Australian shares (.AXJO) dipped before stabilizing.
Hong Kong (.HSI) and Shanghai shares both lost some gains to stand up 0.4 percent and 0.1 percent, respectively.
"The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions," said Qu Hongbin, chief China economist at HSBC.
In the HSBC manufacturing PMI, compiled by UK-based Markit Group Ltd, the sub-index for total new orders dipped to 48.7, the first time it has retreated below 50 since last September and the new export orders sub index was below 50 for the second consecutive month.
The indexes suggested falling demand from both domestic and overseas firms.
China's official manufacturing PMI, released on Saturday, rose but remained close to 50. It ticked up to 50.8 in May from April's 50.6, although it also pointed to falling orders from export markets.
The Chinese government's official PMI for the non-manufacturing sector, released earlier on Monday, also pointed to a loss of growth. It fell to 54.3 in May from 54.5 in April, the lowest since September last year.
MOMENTUM ELUSIVE
The figures add to evidence China's economy is struggling for momentum, buffeted by weak exports demand and overcapacity in some industrial sectors.
The government is also attempting to rein in credit growth, a lot of which is not finding its way into productive investment but into speculative areas such as property.
The IMF and OECD last week cut their forecasts for 2013 economic growth to 7.75 percent and 7.8 percent, respectively.
China's annual economic growth slowed to 7.7 percent in the first quarter from 7.9 percent in the previous quarter. The full-year annual growth of 7.8 percent in 2012 was the weakest since 1999.
The IMF's cut brings it into line with recent revisions by private institutions, including Bank of America-Merrill Lynch, which pared its forecast this month to 7.6 percent from 8 percent, and Standard Chartered, which cut its estimate to 7.7 percent from 8.3 percent.
ING last month reduced its prediction to 7.8 percent from 9 percent.
Despite the slowdown, most economists believe Beijing will refrain from big-bang stimulus as long as the labor market holds up, since employment is crucial for social stability. Both the official PMI and the HSBC PMI show employment is falling.
The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing room to deliver reforms to the economy to reduce its reliance on exports.
While some economists believe that Beijing may miss its 7.5 percent growth target this year, China's leaders appear to be comfortable for now with a moderation in economic growth.
Premier Li Keqiang said last month the country has limited room to rely on government spending or policy stimulus to spur its growth.
The official PMIs focus on bigger and state-owned firms, while the HSBC/Markit series covers more smaller private enterprises.
"Big manufacturers are supported by state-led investment while smaller firms are more exposed to the volatile export market," said You Hongye, an economist at China Essence Securities in Beijing.

"We still cannot see any signs of recovery but the chances of any sharp slowdown are also small."

(Additional reporting by Kevin Yao; Editing by Neil Fullick)