China factory activity contracts in May

china flash pmi may
An index of activity in China's huge manufacturing sector hit a 7-month low in May.

Fears of a slowdown in global growth were reinforced Thursday as a preliminary report on China's manufacturing in May showed activity contracted for the first time in seven months.

Global bank HSBC said its "flash" index of purchasing managers' sentiment fell to 49.6 from a final reading of 50.4 in April. It's the first time the index has fallen below 50 since October 2012. Any reading above 50 signals expansion in the manufacturing sector.

The strength of manufacturing in China is considered a barometer of the global economy because of the nation's role as a powerhouse exporter. Because it makes up a large part of China's economy, manufacturing plays an important role in shaping domestic policy.

"The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds," noted HSBC economist Hongbin Qu.

"A sequential slowdown is likely in the middle of the second quarter, casting downside risk to China's fragile growth recovery."

China recorded its weakest growth in 13 years in 2012, but the world's second biggest economy rebounded in the fourth quarter to post growth of 7.9%, easing concerns about a hard landing.

Growth slowed again in the first quarter to 7.7%, a weaker performance than economists were expecting but still ahead of the government's annual target of 7.5%.

May's weaker-than-expected PMI survey followed a fall in the reading for last month and could increase pressure on the Chinese government to cut taxes and increase spending to stimulate the economy.

Inside a Chinese ghost mall
Inside a Chinese ghost mall

But with no sign of a cooling in the property market, and mounting concerns about soaring debt levels, monetary policy is likely to remain unchanged.

"We believe the government will not loosen monetary policy to stimulate the economy in the second quarter because the labor market is still tight and although headline activity indicators are weaker, they are not collapsing," noted Nomura economist Zhiwei Zhang.

HSBC's final reading of May purchasing managers' sentiment is due on May 1, as is the Chinese government's reading.

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