China Economy

China factory activity healthiest in five months, HSBC flash PMI shows

HSBC flash PMI of 49.7 is best reading in five months, but still shows slight contraction

PUBLISHED : Thursday, 22 May, 2014, 10:18am
UPDATED : Monday, 30 May, 2016, 5:01pm

China's factory sector turned in its best performance in five months this month, a preliminary HSBC survey showed yesterday, though overall manufacturing growth still contracted slightly, suggesting the outlook remains murky.

The HSBC flash China manufacturing purchasing managers index (PMI) recovered to 49.7 from April's final reading of 48.1, beating a Reuters' poll forecast of 48.1.

But the data is a touch below the 50-point level that separates a monthly growth in activity from a contraction, indicating that manufacturers actually experienced a slight drop in business.

We think more policy easing is needed to put a floor under growth

Still, those hoping for any sign of stabilisation in China's wobbly economy may find some welcome relief in the report.

A breakdown of the survey results showed the handful of closely followed indices that measure output, domestic and foreign demand all improved substantially to rise above the 50-point mark, from sub-50 levels in April.

New export orders, a proxy for foreign demand, showed the biggest turnaround. The index climbed a hefty 3.4 points to 52.7, a level not seen in nearly three-and-a-half years.

"The improvement was broad-based, with both new orders and new export orders back in expansionary territory," said Qu Hongbin, chief economist for China at HSBC.

"Disinflationary pressures also eased over the month, and output prices increased for the first time since November 2013.

"Some tentative signs of stabilisation are emerging, partly as a result of the recent mini stimulus measures and lower borrowing costs."

But downside risks to growth remained, particularly as the property market in China continued to cool, Qu said. "We think more policy easing is needed to put a floor under growth in the coming months."

Qu said the employment index fell further to 47.3, implying that the uptick in sentiment had not yet filtered through to the labour market.

Of the 11 sub-indices in the survey, all but those for employment and stocks of finished goods rose from last month.

In the case of employment, the index fell over a point to stand well under 50, the 13th consecutive month that jobs have been lost in the manufacturing sector.

Any marked weakening in the labour market would raise alarm bells for China's government, which regards healthy employment levels as a top policy priority and an important condition for social stability.

Premier Li Keqiang said in March that it was all right if economic growth came in slightly below the government's 7.5 per cent target, as long as the job market held up.