China Manufacturing Unexpectedly Contracts in Blow to Growth

China, May 23 – China’s manufacturing is contracting in May for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.

The preliminary reading of 49.6 for a Purchasing Managers’ Index (EC11FLAS) released today by HSBC Holdings Plc and Markit Economics compares with a final 50.4 for April. The number was also below the 50.4 median estimate in a Bloomberg News survey of 13 analysts. A reading above 50 indicates expansion.
Asian stocks slumped after the data, which may test the new government’s commitment to tolerate slower growth after Premier Li Keqiang last week signaled reluctance to add stimulus. Investors soured on China’s outlook in a Bloomberg global poll this month, with the share of respondents who see the economy deteriorating doubling from January.

“The slowdown is really bad,” said Ken Peng, a BNP Paribas SA economist based in Beijing. “It’s a big probability now that China’s GDP growth rate in the second quarter will be lower than in the first quarter,” he said, referring to gross domestic product.

The MSCI Asia Pacific Index of stocks fell 2.3 percent as of 1:27 p.m. in Tokyo, headed for the biggest loss in a year. The Australian dollar and copper also declined. The benchmark Shanghai Composite Index (SHCOMP) of stocks rose 0.1 percent as of the 11:30 a.m. local-time break.

Growth Slows

China’s growth unexpectedly slowed to 7.7 percent in the first quarter while remaining above the government’s full-year target of 7.5 percent. Data earlier this month on fixed-asset investment and factory production missed forecasts and gauges of manufacturing and service industries declined. The economy expanded 7.8 percent in 2012, the slowest pace in 13 years.

HSBC will release the final PMI reading on June 3. The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own PMI survey, with a bigger sample size, on June 1. The official PMI in April was 50.6, down from 50.9 in March.

The preliminary, or flash PMI is based on about 85 percent to 90 percent of responses from more than 420 manufacturers. Today’s data reflect “slower domestic demand and ongoing external headwinds,” Qu Hongbin, HSBC’s Hong Kong-based chief China economist, said in a statement. Signs of labor-market slack “call for more policy support,” Qu said. “Beijing still has fiscal ammunition to do so.”

A gauge of output showed a preliminary reading of 51 for May, down from 51.1 in April, according to HSBC. 

Stimulus Debate

“We disagree with HSBC’s call for firing fiscal bullets” because it’s not in line with the new leadership’s policy, said Steve Wang, chief China economist in Hong Kong for Reorient Financial Markets Ltd. Output is still expanding and an index of export orders improved, Wang said.

Previously released data showed industrial production rose 9.3 percent in April from a year earlier, below the median analyst estimate of 9.4 percent in a Bloomberg News survey. Fixed-asset investment excluding rural areas rose 20.6 percent in the first four months of the year, compared with forecasts for 21 percent.

The National Development and Reform Commission, China’s top economic-planning agency, in April approved 54.6 billion yuan ($8.9 billion) of subway projects in four cities, according to statements posted on the commission’s website.

UBS AG this week cut its economic-growth forecast to 7.7 percent from 8 percent for this year, joining Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. in reducing estimates for 2013 expansion.

Interest Rates

At the same time, economists have forecast that the People’s Bank of China is more likely to raise interest rates than cut them in the coming year. Eight of 15 analysts surveyed by Bloomberg News earlier this month project an increase in the benchmark deposit rate by the end of June 2014, compared with two who see a reduction.

Iron ore slumped into a bear market last week on concern that slowing economic growth in China, the world’s biggest buyer, will hurt the outlook for demand. Prices will decline as supplies expand over the long term, Alan Chirgwin, general manager of iron ore marketing at Australia’s BHP Billiton Ltd., the largest mining company, said May 8.

-BLOOMBERG