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Asia Economy Last Updated: Jun 3, 2014 - 6:45 AM

China's manufacturing PM1 fell slightly in May; Official report shows services robust
By Finfacts Team
Jun 3, 2014 - 5:32 AM

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China's manufacturing PM1 (purchasing managers' index) was published Tuesday and reflecting activity in the private sector, shows a dip in output for the fourth straight month. An official PMI report on manufacturing mainly reflecting activity of state-owned firms, shows a slight rise in output while a report on services issued today signalls a robust performance.

A Markit report that was prepared for HSBC Plc, the global bank, shows that latest data signalled operating conditions in China’s manufacturing sector deteriorated only marginally in May. Output contracted at a fractional pace, while new orders stabilised after a three-month sequence of decline. Subdued client demand was linked by panellists to relatively weak market conditions. In contrast, new export orders rose at the quickest pace in over four years, with a number of companies citing new client wins. Job shedding meanwhile persisted, with the latest reduction of workforce numbers the strongest in three months.

After adjusting for seasonal factors, the HSBC PMI - - a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy - - posted at 49.4 in May, down slightly from the earlier flash reading of 49.7, and up from 48.1 in April. The reading signalled only a marginal deterioration in business conditions. The health of the sector, however, has now deteriorated in each month of 2014 so far.

Manufacturers in China reported a fourth successive monthly fall in output during May. That said, the rate of contraction was only fractional. According to panellists, uncertain economic conditions led some firms to lower production over the month. Total new business was unchanged in May, following a three-month sequence of reduction. Data suggested that muted domestic demand hindered overall new work wins, as new export orders rose at the fastest rate since April 2010.

Improving demand conditions led to an increased amount of purchasing activity in May, albeit only marginal. Nonetheless, it was the first time that input buying had increased in four months. Stocks of purchases were relatively unchanged in May, ending a three-month sequence of depletion. Inventories of finished goods fell for the first time in 2014 so far, though only slightly, as some companies increased their use of current stocks to meet new incoming orders.

Employment at manufacturing companies declined again in May, as has been the case since November 2013. The rate of reduction was marked overall, and partly driven by company down-sizing policies. Despite lower staffing levels, backlogs of work also declined.

Average cost burdens fell again in May, though the rate of deflation was the weakest in the current five-month sequence. In contrast, output charges increased for the first time in 2014 so far, with some firms commenting that improved demand conditions boosted pricing power.

Hongbin Qu, chief economist, China & co-head of Asian Economic Research at HSBC said: "The final HSBC China Manufacturing PMI rebounded to 49.4 in May, up from 48.1 in April, and revised down slightly from the earlier flash reading of 49.7. New orders stabilized, while new export orders recorded an impressive expansion of 53.2. But growth momentum looked weaker than suggested in the flash reading as the stocks of finished goods index was revised up to 49.8 from 48.8 in the flash reading. The final PMI reading for May confirmed that the economy is stabilizing, but it is too early to say that it has bottomed out, particularly in light of a weaker property sector. The lack of a sustainable growth momentum warrants stronger policy support. We expect both monetary and fiscal policy to be loosened gradually over the coming months."

Reuters reports that China's services sector grew at its fastest pace in six months in May as new orders rebounded.

The official non-manufacturing PMI climbed to 55.5 from April's 54.8, the National Bureau of Statistics said. That is well above the 50-point level that separates an expansion from a contraction in activity.

New orders recovered to an eight-month high of 52.7, compared to April's 50.8. Business expectations also held their ground at a solid 60.7, compared to April's 61.5.

Official data on Sunday showed China's manufacturing industry grew at its fastest pace in five months in May due to rising new orders, as a PMI for the sector touched a high of 50.8 in May.

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