China factory PMI shrinks for third month in May

Poor data reinforces views that govt needs to take bolder steps to combat slowdown

Chinese factory activity contracted for the third month in May and output shrank at the fastest rate in just over a year, a private survey showed, indicating persistent weakness in the world's second-largest economy that requires increased policy support.

The poor reading, which followed a raft of downbeat April data, reinforced analysts' views that the government has to take bolder steps to combat a protracted slowdown, as growth threatens to drop below 7% for the first time since the global financial crisis.

The flash HSBC/Markit Purchasing Managers' Index (PMI) fell to 49.1 in May, below the 50-point level that separates growth in activity from a contraction on a monthly basis.

Economists polled by Reuters had forecast a reading of 49.3, slightly stronger than April's final reading 48.9.

After a brief rebound in February, the index has now been back in negative territory for three consecutive months.

The sub-index on new exports orders fell to a 23-month low of 46.8 in May, while overall new orders shrank for the third straight month, albeit at a slower pace.

The output sub-index contracted for the first time this year, to a 13-month low of 48.4, while the employment sub-index showed manufacturers shed jobs for the 19th month in a row.

"Softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions," said Annabel Fiddes, an economist at Markit.

“On a positive note, deflationary pressures remained relatively strong, with both input and output prices continuing to decline, leaving plenty of scope for the authorities to implement further stimulus measures if required.”

The central bank is widely expected to cut interest rates further in coming months, on top of three reductions since November, and is also likely to lower banks' reserve requirements again to reduce companies' borrowing costs and encourage more lending.

The government is stepping up fiscal spending, with a strong focus on infrastructure projects. China has approved 250 billion yuan ($40.30 billion) of railway and subway projects so far this year, the country's top economic planner said on Monday.

China's economic growth slowed to a six-year-low of 7% in the first quarter, weighed down by a weakening property sector and softening domestic and export demand, which is leaving more and more factory capacity standing idle.

Recent data showed a further loss of momentum heading into the second quarter, with investment growth in January-April falling to its lowest in nearly 15 years.

That increases the risks that the government will not meet its full-year growth target of around 7%, even with additional stimulus measures.