A gauge of Chinese manufacturing remained sluggish, underscoring the tepid response to government efforts to cushion a slowdown in the world’s second-largest economy.
The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.1 for May, missing the median estimate of 49.3 in a Bloomberg survey. Numbers below 50 indicate contraction.
The government has escalated efforts to prevent a hard landing, adding fiscal loosening to monetary easing. In the latest moves, it relaxed financing rules for local governments in a bid to boost demand for credit, while three interest-rate cuts since November aim to lower borrowing costs.
“The policy easing hasn’t shown its effect yet,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, adding that he expects the economy to stabilize in the third quarter. “Credit supply has been sufficient, but demand has remained weak.”
Chinese shares climbed and interest-rate swaps rose.
Manufacturing output slipped to a 13-month low, the PMI report showed, while employment remained in contraction zone.
“Softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions,” Annabel Fiddes, economist at Markit, wrote in the report.
Policy makers are considering relaxing rules for bond sales in a bid to boost growth, while banks have been instructed to keep funding projects that were approved before year-end 2014, even if borrowers can’t make repayments.
“Overall growth remains weak, but we do see some tentative signs of improvement,” Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong, said in an e-mail. “The loosening fiscal policy will lead to rapid growth of infrastructure building and thus partially offset the slowdown in property investment and other investment, improving short-term growth momentum.”
Premier Li Keqiang’s government is balancing structural reforms including new fiscal arrangements and moves to open the nation’s capital account with the need to keep economic growth ticking along rapidly enough to sustain employment.
“Despite the strong desire from policy makers to accelerate China’s structural reforms, stimulus to reverse the economic downturn is the priority for now,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. In Hong Kong, wrote in a note Wednesday. “Taking more concrete steps will be difficult until the economy stabilizes.”
— With assistance by Xiaoqing Pi