China’s manufacturing index drops into negative territory in May as economic pressures mount
- The manufacturing purchasing managers’ index (PMI), a gauge of sentiment among factory operators, fell to 49.4 in May
- This was a decrease on April’s performance of 50.1, and below the median expectations of a poll of Bloomberg analysts, which had predicted a drop to just 49.9
China’s manufacturing purchasing managers’ index fell further in May, suggesting the economy is continuing to slow amid the escalating trade war with the United States.
The 49.4 reading was the lowest since February’s 49.2.
Non-manufacturing PMI, which covers the services and construction sectors, remained the same as last month at 54.3, in line with the expectations of the Bloomberg poll.
“The fall in the headline index was mostly driven by weaker new orders. Export orders dropped back particularly sharply, which suggests that [US President Donald] Trump’s latest tariff hike may already be undermining foreign demand,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“Stocks of raw materials continued to decline, reversing the build-up of inventories ahead of the 1 April VAT cut that helped to temporarily boost output in March.”
The composite PMI, which combines both manufacturing and services activity, was 53.3 in May, a slight decrease on 53.4 a month earlier.
An index reading above 50 indicates growth, while anything below 50 indicates a contraction.
The dip into contractionary territory for China’s manufacturing sentiment will be a concern to policymakers in Beijing, as they struggle to contain the effect the trade war is having on both economic mood and investment sentiment. While both composite and non-manufacturing PMIs remained above contraction levels, their stagnation points to continued challenges facing China’s economy.
The new data, released by the National Bureau of Statistics (NBS), combined with weaker economic data readings for April, suggest that Chinese growth slowed in the second quarter after stabilising at 6.4 per cent in the first quarter.
Details of the data show that within the manufacturing PMI, new orders were 49.8, down from 51.4 in April. Output also fell to 51.7, from 52.1 last month, while employment fell to 47.0 from 47.2 and new export orders plunged to 46.5 from 49.2.
Within the non-manufacturing PMI, the service sector was up to 53.5 from 53.2 in April, which the NBS said showed that “the service industry continued to maintain rapid growth”.
“China’s non-manufacturing business activity index was 54.3 per cent, which was the same as last month, indicating that the non-manufacturing industry continued to develop steadily and rapidly,” said the NBS statement.
Zhao Qinghe, senior statistician at the Service Industry Research Centre at the NBS, said that “there was some fluctuation in the manufacturing boom” and pointed to slowing demand as the cause of the slump.
“In May, the manufacturing PMI fell back. Among the 21 industries surveyed, 13 of the industry's production indices are located in the expansion range, indicating that most industries in the manufacturing industry are relatively stable in production and operation,” said Zhao.
Zhao added that “the overall production and operation activities of Chinese enterprises have maintained a stable development trend”.
The deterioration in the PMI sentiment data was expected after the US escalated the trade war on May 10. From Saturday, a higher tariff of 25 per cent – increased from the earlier 10 per cent rate – will apply to US$200 billion of Chinese imports to the US. The US is also processing a tariff of up to 25 per cent on a further US$300 billion of Chinese goods, which would put significant further pressure on the Chinese economy. China has already retaliated by placing variable tariffs on US$60 billion of US imports.
Even before the escalation of the trade war, Chinese economic data in April was disappointing.
Retail sales growth slowed to 7.2 per cent in April – the lowest rate in 16 years – from 8.7 per cent in March, while industrial production growth slowed markedly to 5.4 per cent from 8.4 per cent. Exports fell 2.7 per cent in April compared with the same period in 2018, a sharp reversal from the 14.2 per cent rise in March.
In part, the government is counting on already implemented personal and business tax cuts – including the trimming of the value-added tax rate for manufacturing firms – to gradually provide support for the economy.
The PMI rounds off a poor week for China’s economy after Monday’s industrial profits released by the NBS showed the fastest slump in almost three and a half years in April.