China Manufacturing Tops Estimates in Sign Growth Is Stabilizing

China’s manufacturing unexpectedly accelerated in May, indicating that a slowdown in economic growth in the first quarter may be stabilizing.

The Purchasing Managers’ Index rose to 50.8 from 50.6 in April, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in Beijing yesterday. That was higher than all estimates in a Bloomberg News survey of 30 analysts and compares with the median projection of 50, which marks the dividing line between expansion and contraction.

The report may provide some comfort to policy makers after the preliminary reading of a private manufacturing survey pointed to the first contraction in seven months. Premier Li Keqiang said last week that government measures to reform the economy will be accompanied by tapered-off levels of growth and warned last month that new stimulus would create risks.

“Given the mixed signals, I’d wait for the full set of activity data such as industrial production and electricity production to judge the momentum of the economy,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “The rise of the official PMI further reduces the chance for monetary policy easing.”

The statistics bureau will release May industrial output, retail sales, and inflation data on June 9 along with fixed-asset investment for the first five months of the year. The customs administration will report May trade figures on June 8.

More Stable

The preliminary reading of a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics fell to 49.6 in May from 50.4 in April. The decline, if confirmed in the final report tomorrow, will be the gauge’s first drop below 50 since October.

The federation and HSBC will also release non-manufacturing surveys for May this week, providing a fuller picture of an economy that’s increasingly reliant on service industries for growth. Both showed slower expansion in April.

President Xi Jinping said the fundamentals of the Chinese economy are “sound” and growth is on a “more stable footing,” according to the English-language transcript of a written interview he gave to Latin America media released by the official Xinhua News Agency on May 31. “We are more interested in the quality and efficiency of economic growth rather than the speed of growth only,” he said, noting that employment is stable and incomes are rising.

Xi’s comments, made ahead of his visit to Trinidad and Tobago, Costa Rica and Mexico, reinforce signals from policy makers that the government is prepared to tolerate a slower pace of expansion after annual average growth of 10.5 percent in the past decade led to industrial overcapacity, rising financial risks and environmental degradation.

New Risks

China’s economy grew 7.8 percent in 2012, the slowest pace in 13 years and the government in March set a goal of 7.5 percent for this year. Last month, Premier Li warned that room for stimulus policies and government investment to meet its targets “is not big” and that such action would create “new problems and risks.”

There will be no “incremental stimulus by the new government which understands the slowing potential growth and wishes to focus more on structural reforms,” Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a research note yesterday.

Stocks in China fell 0.7 percent on May 31 on concern the official PMI report would also show a decline. The Shanghai Composite Index rose 0.5 percent for the week and has rebounded 5.8 percent from this year’s low on May 2.

Positive Reaction

“Markets’ fear of a further growth slowdown will be alleviated and we expect a positive market reaction” tomorrow, Lu said.

Analysts are paring forecasts for economic growth after expansion unexpectedly slowed to 7.7 percent in the first quarter from a year earlier. The median estimate in a Bloomberg News survey conducted from May 16 to May 21 was for a pace of 7.8 percent in the second quarter, down from a projection of 8 percent in an April survey.

The logistics federation increased the number of companies in its manufacturing survey to 3,000 from 820 and reclassified the industries covered into 21 groups from 31 starting from January’s reading. The HSBC report is based on responses from purchasing managers at more than 420 businesses, and is weighted toward smaller private companies.

Different Focus

Divergences in the two indexes are common given their different focus and coverage, said Wang Tao, chief China economist at UBS AG in Hong Kong.

Previously released data show the federation’s PMI expanded at a faster pace in the first three months of 2012, while the HSBC gauge contracted over the same period.

In yesterday’s report, a PMI gauge for smaller companies fell to 47.3 in May from 47.6 the previous month, a decline Wang said is consistent with the HSBC index.

The increase in the main PMI reading was driven by faster growth in output, while a measure of new export orders showed a contraction for the fourth time in five months. The reading for new orders rose to 51.8 from 51.7.

CSR Corp. China’s biggest train-maker by market value, signed contracts worth about 7.81 billion yuan ($1.27 billion), according to a statement posted to Shanghai’s stock exchange on May 27. The deals include supply agreements for locomotives, subway cars and hybrid buses, the company said.

At the same time, a gauge of business activity expectations fell to the lowest level since January and an index of employment fell to 48.8, the 12th straight sub-50 reading.

While the deteriorating employment situation may suggest weak growth, it could indicate increasing automation, a declining labor force due to the aging population and a rising percentage of migrant workers shifting to services, Bank of America’s Lu said.