China May Factory Output Contracts in Test for Premier

Photographer: Tomohiro Ohsumi/Bloomberg

Workers labor on a house under construction at the Sino-Singapore Tianjin Eco-city in Tianjin. Close

Workers labor on a house under construction at the Sino-Singapore Tianjin Eco-city in Tianjin.

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Photographer: Tomohiro Ohsumi/Bloomberg

Workers labor on a house under construction at the Sino-Singapore Tianjin Eco-city in Tianjin.

China’s manufacturing is contracting in May for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.

The preliminary reading of 49.6 for a Purchasing Managers’ Index (EC11FLAS) released today by HSBC Holdings Plc and Markit Economics compares with a final 50.4 for April and the 50.4 median estimate in a Bloomberg News survey. A reading above 50 indicates expansion. A separate Markit index (SHCOMP) for euro-area services and factory output increased more than forecast.

Asian stocks slumped after the data, which may test the new government’s commitment to tolerate slower growth after Premier Li Keqiang last week signaled reluctance to add stimulus. Investors soured on China’s outlook in a Bloomberg global poll this month, with the share of respondents who see the economy deteriorating doubling from January.

“The slowdown is really bad,” said Ken Peng, a BNP Paribas SA economist based in Beijing. “It’s a big probability now that China’s GDP growth rate in the second quarter will be lower than in the first quarter,” he said, referring to gross domestic product.

The MSCI Asia Pacific Index of stocks fell 3.2 percent as of 5:34 p.m. in Tokyo, headed for the biggest loss since November 2011, as Japan’s Topix Index closed down 6.9 percent, the most since the aftermath of the Fukushima disaster in March 2011. The Australian dollar and copper also declined. The benchmark Shanghai Composite Index of stocks fell 1.2 percent at the close, the largest drop in a month.

Euro Recession

A euro-area composite index based on a survey of purchasing managers in services and manufacturing rose to 47.7 from 46.9 in April, London-based Markit said today, adding to signs the currency union is beginning to emerge from its record-long recession. The manufacturing and services gauges improved to 47.8 and 47.5, respectively, both three-month highs.

Still, the composite index has been below 50, indicating contraction, for 16 consecutive months. The European Central Bank, which cut its benchmark interest rate to a record low of 0.5 percent this month, forecasts the euro-area economy will shrink 0.5 percent in 2013.

“The euro zone’s second recession in five years looks set to drag on into a seventh successive quarter,” Markit’s chief economist, Chris Williamson, said in today’s report. “The ECB’s quarter-point cut in interest rates seems to have done little to inspire confidence that the economy will start to pick up again.”

U.S. Manufacturing

Elsewhere in Europe, Britain’s economy resumed growth in the first quarter as companies built up stocks and consumer spending increased, offsetting a drop in exports. Gross domestic product rose 0.3 percent in the period.

Markit’s U.S. manufacturing index probably fell to 51.2 in May from 52.1 a month earlier, according to the median of 13 economists’ estimates in a Bloomberg survey before a report later today.

China’s growth unexpectedly slowed to 7.7 percent in the first quarter while remaining above the government’s full-year target of 7.5 percent. Data earlier this month on fixed-asset investment and factory production missed forecasts and gauges of manufacturing and service industries declined. The economy expanded 7.8 percent in 2012, the slowest pace in 13 years.

Second-quarter growth was projected at 7.8 percent, based on the median estimate in a Bloomberg News survey conducted from May 16 to May 21, down from last month’s 8 percent forecast.

‘External Headwinds’

HSBC will release the final PMI reading on June 3. The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own PMI survey, with a bigger sample size, on June 1. The official PMI in April was 50.6, down from 50.9 in March.

The preliminary, or flash PMI is based on about 85 percent to 90 percent of responses from more than 420 manufacturers. Today’s data reflect “slower domestic demand and ongoing external headwinds,” Qu Hongbin, HSBC’s Hong Kong-based chief China economist, said in a statement. Signs of labor-market slack “call for more policy support,” Qu said. “Beijing still has fiscal ammunition to do so.”

A gauge of output showed a preliminary reading of 51 for May, down from 51.1 in April, according to HSBC.

“We disagree with HSBC’s call for firing fiscal bullets” because it’s not in line with the new leadership’s policy, said Steve Wang, chief China economist in Hong Kong for Reorient Financial Markets Ltd. Output is still expanding and an index of export orders improved, Wang said.

Subway Projects

Previously released data showed industrial production rose 9.3 percent in April from a year earlier, below the median analyst estimate of 9.4 percent in a Bloomberg News survey. Fixed-asset investment excluding rural areas rose 20.6 percent in the first four months of the year, compared with forecasts for 21 percent.

The National Development and Reform Commission, China’s top economic-planning agency, in April approved 54.6 billion yuan ($8.9 billion) of subway projects in four cities, according to statements posted on the commission’s website.

UBS AG this week cut its economic-growth forecast to 7.7 percent from 8 percent for this year, joining Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. in reducing estimates for 2013 expansion.

At the same time, economists have forecast that the People’s Bank of China is more likely to raise interest rates than cut them in the coming year. Eight of 15 analysts surveyed by Bloomberg News earlier this month project an increase in the benchmark deposit rate by the end of June 2014, compared with two who see a reduction.

‘No Sign’

JPMorgan Chase & Co., among those projecting an interest-rate increase, said in a note today that “there is no sign that the new government will introduce new pro-growth measures in the very near term despite the weak economic data.”

Iron ore slumped into a bear market last week on concern that slowing economic growth in China, the world’s biggest buyer, will hurt the outlook for demand. Prices will decline as supplies expand over the long term, Alan Chirgwin, general manager of iron ore marketing at Australia’s BHP Billiton Ltd. (BHP), the largest mining company, said May 8.

To contact Bloomberg News staff for this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

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

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