China Manufacturing Expands Less Than Forecast in May

China’s manufacturing grew less than forecast in May, a government report showed, increasing the odds the government will boost stimulus to counter a deceleration in the world’s second-biggest economy.

The Purchasing Managers’ Index expanded at a slower pace for the first time in six months, falling to 50.4 from 53.3 in April, China’s statistics bureau and logistics federation said in a statement today in Beijing. It’s the weakest reading since December and compares with the 52.0 median forecast in a Bloomberg News survey of 27 economists. A reading above 50 indicates expansion.

The report signals a deepening economic slowdown, raising chances Premier Wen Jiabao will take more-aggressive steps to sustain expansion after he pledged a sharper focus on stabilizing growth. The government’s stimulus response may be as high as 2 trillion yuan ($315 billion), half the size of 2008’s package, Credit Suisse Group AG said this week.

“The economy is probably cooling faster than originally expected,” Chang Jian, a Hong Kong-based economist at Barclays Capital who formerly worked for the World Bank, said before the release. “The only effective way to stabilize growth quickly is through investment.”

The MSCI Asia Pacific Index of stocks extended losses, dropping 1 percent as of 10:05 a.m. in Tokyo.

Economic growth may be below 8 percent this quarter and the possibility of a cut in the benchmark lending rate has risen, Chang said. Credit Suisse said expansion may slow to 7 percent in the three months through June 30.

Stocks Forecast

The benchmark Shanghai Composite Index has climbed about 8 percent this year on speculation the government will accelerate measures to boost the economy. The gauge is poised to gain 15 percent by the end of 2012 from May 30 as slowing inflation allows authorities to loosen monetary policy and banks to lend more to companies, according to Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s partner in China.

China has allowed the yuan to weaken against the dollar this year after appreciating 4.7 percent in 2011. The currency fell 0.2 percent yesterday to 6.3690, the lowest close since December.

The federation’s index is based on responses from managers at 820 companies. The gauge usually has a seasonal decline in May, with the reading decreasing by an average 2.7 points from April during 2005 to 2011, Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co., said before the release.

Final Reading

A separate purchasing managers’ index indicated that manufacturing may have contracted for a seventh month in May, according to a May 24 preliminary report on the gauge from HSBC Holdings Plc and Markit Economics. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due later today.

China is grappling with fallout from Europe’s worsening debt turmoil, which threatens to curb exports further should Greece abandon the euro. The slowdown in overseas sales may affect whether Moody’s Investors Service raises the nation’s sovereign debt rating, Tom Byrne, a senior vice president, said May 28.

The economy may grow 7.9 percent this quarter from a year earlier in a sixth quarterly deceleration, based on the median estimate in a Bloomberg survey last month.

Full-year expansion is forecast at 8.2 percent, which would be the lowest since 1999. Standard & Poor’s said in a report dated May 29 that it sees a “fairly slim chance” of a so- called hard landing this year where growth would slow to 5 percent, although expansion is “undoubtedly slowing.”

Growth Pledge

Wen and the State Council, or Cabinet, pledged last month to focus more on stabilizing growth after trade, industrial production and lending in April were lower than economists forecast. Authorities have since indicated they are approving more capital spending and bond sales, with the government last week permitting the 134 billion yuan construction of two steel factories after a two-year delay.

The People’s Bank of China on May 12 cut banks’ reserve- requirement ratio by 50 basis points for the third time in six months to boost liquidity and spur lending. Economists surveyed by Bloomberg last month forecast further reductions in the ratio this year.

--Zheng Lifei. With assistance from Ailing Tan in Singapore and Zhou Xin in Beijing. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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