China’s Factory Outlook Slips in May Amid Slow Recovery

(Bloomberg) -- A gauge of China's manufacturing activity slipped in May, underlining the slow pace of recovery from the first-quarter slump.

The official manufacturing purchasing managers' index declined to a worse-than-expected 50.6, from 50.8 a month earlier, according to data released Sunday by the National Bureau of Statistics. The non-manufacturing gauge rose to 53.6. Readings above 50 indicate improving conditions.

The data indicate that China's recovery from the pandemic shutdowns risks faltering after an initial rebound supported by pent-up demand. While industrial firms are mostly back at work and output is rising again, a collapse in orders has sent a shock-wave through the sector.

A separate survey released Monday showed that manufacturing rose back above 50. The Caixin manufacturing PMI, which is focused more on smaller firms and exporters, strengthened to 50.7.

The compares with the outlook for manufacturing across much of the rest of Asia, which is still in contraction. In China, the output reading rose to the highest since January 2011 and the index for new orders rose to the highest since January this year.

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“Global demand is still weak even when lockdowns are relaxed in some major cities around the world,” said Iris Pang, greater China chief economist with ING Bank NV in Hong Kong. “The employment level was in contraction again in May, and that highlights the layoff of factory workers after factories have faced continual withdrawal of export orders.”

The sub-index of new export orders climbed to 35.3, manufacturing employment softened to 49.4, while non-manufacturing employment was at 48.5.

What Bloomberg's Economists Say

“The Chinese economy should continue to pick up in the coming months. Conditions are on the mend at home. External demand is likely to improve as economies overseas begin to exit lockdowns. That said, the potential for mishaps is high given rising tensions between the U.S. and China.”

Chang Shu, Chief Asia Economist

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The government unveiled its stimulus package for the year at the National People's Congress meeting that concluded last week, and scrapped a hard growth target in light of the uncertain global economy, while pledging targeted monetary easing and trillions of yuan in extra infrastructure spending.

Domestic factories have brought some workers back to staff production lines after the shutdowns in the first quarter and are increasing production, but many are facing a build up in inventories and uncertain orders. Others have not recovered, meaning bankruptcies and unemployment are expected to rise.

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“The current global epidemic situation and the world economic situation are still grim and complex, and foreign market demand continues to shrink,” Zhao Qinghe, an economist with the statistics bureau, said in a statement accompanying the data release. Despite small increases in the manufacturing new export order index and import index this month, they “remain at historically low levels,” he said.

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With assistance from Bloomberg