- Conditions for China’s manufacturing sector are getting worse again.
- The official manufacturing PMI fell to 49.4 points in May, below the 49.9 level expected by economists. It was the first time in three months that activity levels went backwards.
- New export orders placed at manufacturers and non-manufacturers both fell at a faster pace than April, coinciding with an escalation in trade tensions with the United States.
- Financial markets have not reacted to the weak manufacturing reading, likely reflecting that disappointing data increases the odds of additional fiscal and monetary stimulus.
Activity levels across China’s vast manufacturing sector are getting worse, deteriorating for the first time in three months in May.
The government’s Manufacturing Purchasing Managers Index (PMI), released by China’s National Bureau of Statistics (NBS), fell to 49.4 in seasonally-adjusted terms, down 0.7 points on the level reported in April.
Markets had been expecting the PMI to fall by a smaller 0.2 points to 49.9.
As a reminder, PMIs measure perceived changes in activity levels across a particular sector from one month to the next, in this case, China’s manufacturing sector.
Any figure above 50 signals that activity levels improved while a reading below suggests they are deteriorating. The distance away from 50 indicates how quickly activity levels are improving or deteriorating.
So at 49.4 in May, activity levels weakened, albeit not by a great deal.
The sharper-than-expected decline follows an escalation in trade tensions with the United States — China’s largest bilateral trade partner — following an abrupt end to trade negotiations between the two nations at the start of this month.
Activity levels at larger manufacturers continued to improve in May, albeit a slower pace than a month earlier. For small and mid-sized firms, activity levels weakened at a faster pace than April.
Of note, the NBS said new export orders declined at the fastest pace since February this year. New orders from abroad have now fallen in each of the past 11 months.
New domestic orders also fell for the first time since January, although the decline was negligible.
Staffing levels continued to decline, as did imports and inventories of raw materials and finished goods. Orders outstanding also fell.
Input prices grew at a slower pace while those to customers slipped for the first time in three months.
Unsurprisingly, sentiment towards the 12-month outlook also softened.
However, while China’s manufacturing sector went backwards, other parts of the economy fared better.
The separate non-manufacturing PMI released by the NBS held steady at 54.3 in May after seasonal adjustments. This PMI basically surveys all other Chinese business sectors, including the construction industry.
Not once in the history of the NBS survey has a deterioration occurred in China’s non-manufacturing sectors.
New exports orders placed at non-manufacturers also fell, offset by a slight uptick in domestic demand.
Staffing levels were cut for a ninth consecutive month while outstanding orders and inventories went backwards.
Like the manufacturing sector, input costs rose marginally while final prices to customers fell slightly.
Despite the weak manufacturing report card, financial markets have shown little reaction to the report. That may reflect that weak data increases the odds of Chinese policymakers rolling out additional stimulus measures to support economic activity.
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