China factory activity shrinks, adds to growth fears

Mon Jun 3, 2013 1:28am EDT
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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.   Continued...

Employees work inside a factory which makes bearing cages in Liaocheng, Shandong province May 24, 2013. REUTERS/Stringer