Within the official manufacturing PMI, the new-orders subindex fell to 48.3 in May from 48.8 in April, while the new-export-orders subindex fell to 47.2 from 47.6.

Analysts from HSBC said the “deeper contraction” in the manufacturing PMI, compared with the non-manufacturing gauge that fell to 54.5 from 56.4, “showed an ongoing divergence in the recovery between services and manufacturing”.

“The disappointing May NBS PMIs show signs that the recovery momentum has continued to fade. While policymakers have reiterated a pro-growth stance, more needs to be done to help instill more confidence for households and businesses alike, and to set the growth recovery back on track,” said Greater China economists Erin Xin and Jing Liu.

Zhou Hao, an economist with Guotai Junan International, said the reading was “good news for the Chinese economy”, but that more time was needed to determine whether the improvement could be sustained.

Demand is the ‘culprit’ with China’s factories facing ‘downward spiral’

The Caixin PMI is believed to focus on more export-oriented and small firms in coastal regions and is compiled by S&P Global from responses to questionnaires sent to purchasing managers in China.

But while the Caixin PMI in China, and also a similar survey in Japan, showed swings in factory activity toward growth last month, they stood in contrast to weak indicators from South Korea, Vietnam and Taiwan, where declines continued as sluggish global demand remained a major challenge for many of Asia’s big exporters.

Strong Services

China’s official non-manufacturing purchasing managers’ index (PMI) fell to 54.5 in May from 56.4 in April.

Within the official non-manufacturing PMI, the services index declined from 55.1 to 53.8, while the construction index also fell from 63.9 to a four-month low of 58.2.

Analysts from Capital Economics said the fall in the construction index suggested that the “prop to infrastructure spending from the front-loading of fiscal support this year is now starting to fade”.

Domestic tourism revenue had jumped to 101 per cent of pre-pandemic levels, reaching 148 billion yuan (US$20.9 billion), during the five-day holiday from late April to early May.

China’s services activity picks up as orders shore up consumption-led recovery

The survey showed service companies reported a rise in new business as the May Day holiday boosted orders for hotels, restaurants and travel agencies.

Wang Zhe, senior economist at Caixin Insight Group, said “it remains a prominent feature of the Chinese economy that the services sector is stronger than manufacturing”.

What do the surveys say about the outlook for China’s economy?

Beijing has pledged to shore up trade to support the overall economic recovery, but China’s exports have struggled due to weak global demand.

China’s economic recovery has already been hit by rising youth unemployment, as well as disappointing retail sales and industrial production.

This prompted some international investment banks to cut their full-year economic growth estimates.

But Julian Evans-Pritchard, an analyst at Capital Economics, said that China’s second-quarter gross domestic product (GDP) growth “may not be as bad as many fear” after manufacturing output ticked up and the service sector is still seeing decent gains.

“The PMI surveys suggest that China’s economic recovery was still ongoing in May. Waning fiscal support weighed on construction activity. But manufacturing output ticked up and the service sector is still seeing decent gains,” said Evans-Pritchard.

“The Caixin composite PMI rose to its highest level since December 2020 in May, thanks to an improvement in the services sector. The official PMIs were less upbeat. But taken together, the data are consistent with faster gains in economic activity last month.

“Currently, the composite PMI points to official [GDP] growth of around 2.5 per cent, quarter on quarter, this quarter (assuming no change in June). That’s higher than the 1.8 per cent, quarter on quarter, we have pencilled in for the second quarter, and leaves us comfortable with our above-consensus [gross domestic product] forecast of 6.5 per cent for this year.”