China factory surveys signal wider economic weakness

Thu May 31, 2012 11:19pm EDT
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By Lucy Hornby and Nick Edwards

BEIJING (Reuters) - China's economy betrayed signs of a broadening slowdown as surveys of its vast factory sector showed momentum eased in May, signaling a deeper-than-forecast deterioration in demand at home and abroad and the likelihood of more policy easing.

The official purchasing managers' index - covering China's biggest, mainly state-backed firms - fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, with output at its lowest since November 2011.

The HSBC China manufacturing PMI, tracking smaller private sector firms, retreated to 48.4 from 49.3 in April - its seventh straight month below the 50-mark that demarcates expansion from contraction - with the employment sub-index falling to 48.1, its lowest level since March, 2009.

"Growth in Q2 is likely to slow, probably below 7.5 percent year-on-year. That puts the annual growth target at risk and the risks continue to increase because the external environment is weakening," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, told Reuters.

"The government will still try to get by with targeted, selective measures like the cash for clunkers program, but we will get more monetary measures as well."

The weakening of both index readings at a headline level is worrying for investors who see economic headwinds intensifying around the world and increasingly look for China - the biggest single provider of growth in the global economy - to pick up the slack.

The price of Brent crude oil fell towards $101 a barrel, the euro touched a fresh two-year low and share prices in Hong Kong and Australia fell in the wake of the data.

Although Beijing has announced a raft of reforms to support growth and unlock private investment since mid-May, it is too early for the PMI data to reflect those efforts.   Continued...

An investor sleeps on chairs next to computers showing stock information at a brokerage house in Wuhan, Hubei province in this February 20, 2012 file photo. China's official purchasing managers' index fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, in the latest sign that output in the world's second-biggest economy is cooling. REUTERS/Stringer/Files