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China’s factory operations in May cool down when weak demand reduces production

BEIJING (Reuters) – China’s factory operations grew at a slower pace in May, but speed in the service and construction sectors accelerated, pointing to an uneven recovery in the world’s second-largest economy as companies emerged through coronavirus-driven shutdowns.

FILE PHOTO: Employees wearing face masks after coronavirus disease (COVID-19) outbreak work on a Lynk & Co car production line at Geely’s Yuyao plant in Ningbo City, Zhejiang Province, China May 7, 2020. REUTERS / Yilei Sun

Manufacturing slowed down in a second month, although activity has been revived from record lows in February, when the government imposed tough travel restrictions, quarantine rules and factory suspensions to limit the spread of airways.

The official Manufacturing Purchasing Manager Index (PMI) dropped to 50.6 in May from 50.8 in April, the National Bureau of Statistics data showed on Sunday, but was held above the 50-point mark that separates expansion from contraction each month. Analysts had expected a PMI reading of 51.

Export orders logged for the fifth consecutive month, with a sub-index of 35.3 in May, well below the 50-point mark, as the coronavirus pandemic continued to charge global demand.

“Judging by PMI sub-indices, the absolute levels of demand-related indices are well below production-related, indicating a pronounced limiting impact from demand on production,” said Zhang Liqun, an analyst with China Federation of Logistics and Procurement (CFLP), adding that more than 50% of companies have reported a lack of demand.

The factories reduced the number for the first time since they opened again, with a sub-index falling to 49.4 from 50.2 in April, the study showed.

In May, the PMI index for medium-sized and small companies fell to 48.8 and 50.8, respectively, while large companies reported a faster expansion of activity.

As an encouraging sign, the forward-looking total new order meter showed an improvement to 50.9 from April 50.2, indicating that domestic demand could grow soon.

“In the short term, we expect monetary policy to continue the” volume “of credit expansion to stabilize growth and help fiscal expansion. In this regard, China’s domestic demand is likely to continue to recover,” analyst with investment bank CICC said in a note after dataförsläppet.

Hammered by the health crisis, China’s economy shrank 6.8% in the first quarter from a year earlier, the first contraction since the quarterly record began. Analysts believe it will be months before the broader activity returns to pre-crisis levels, although a new wave of infections can be avoided.

While most companies have reopened, many manufacturers are struggling with reduced or canceled foreign orders as lockdowns push the global economy into recession. Domestic demand also remains depressed amid increased job losses and worries about a second wave of infections.

Zhao Qinghe, an official at NBS, said more than 80% of factories have resumed production to 80% of levels before the coronavirus outbreak. However, the indexes for imports and exports were at a record low as global demand continues to shrink.

Given the uncertain outlook, the government’s working report did not set an annual growth target earlier this month, the first time China has not set a target since 2002.

But Beijing announced further fiscal measures to strengthen its economy, equivalent to about 4.1% of GDP, according to Reuters estimates, its largest stimulus package since the global financial crisis.

FILE PHOTO: An employee working on a production line manufacturing steel structures at a factory in Huzhou, Zhejiang Province, China May 17, 2020. Photo taken May 17, 2020. China daily via REUTERS

Higher spending, especially on infrastructure, is expected to give operations a solid increase in the second half of the year and into 2021. A sub-index of construction activity rose to 60.8 in May from 59.7 last month, a separate survey on non-manufacturing activity showed, which pointed on a faster uptake in a sector that Beijing expects to boost growth.

New orders for the construction sector rose to 58 compared to 53.2 last month, while the companies also add staff to a faster cut.

Official PMI production increased to 53.6 in May, from 53.2 in April, suggesting that the sector’s business and consumer confidence can slowly improve.

Editing by Jacqueline Wong

Our standards:Thomson Reuters Trust Principles.

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