Twin PMIs show improving Chinese factory activity

China PMI could dampen retail bulls: pro
China PMI could dampen retail bulls: pro   

China's factory activity picked up its pace a tad in the May, twin surveys showed on Monday.

The official purchasing managers' index (PMI), which surveys large companies, rose to 50.2 from 50.1 in April, in line with the forecast from a Reuters poll, and above the 50-mark separating expansion from contraction.

The final HSBC PMI print, which focuses on small and medium sized enterprises, stayed in contraction for a third month at 49.2, but beat the 49.1 figure in April.

The news spurred a rally on the Shanghai Composite, which traded 2.8 percent higher at mid-day, as investors bet on further easing from policymakers.

"The improvement of both PMIs is due to the recent pro-growth policies launched by Chinese authorities," Liu Li-Gang and Zhou Hao, analysts at ANZ Research, said in a note.

"Along with the reserve requirement ratio (RRR) and interest rate cuts, the government has rolled out more supportive fiscal policies," they noted, citing the 1 trillion yuan ($160 billion) local government debt swap plan, lower bond issuance requirement for corporates and local government financing platforms.

"In addition, the banking regulator has also allowed commercial banks to extend maturities on construction loans to developers short of cash," they added.

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The People's Bank of China has cut interest rates three times since November last year and lowered the RRR twice, the latest move shaving the amount of cash major banks must hoard by 100 basis points to 18.5 percent.

The world's second largest economy grew 7 percent in the first quarter, the slowest pace since the depths of the global financial crisis. Beijing is targeting growth of "around 7 percent" for this year.

"I think five months into 2015, the economy is still very sluggish. We see little sign of a pick up, at least on the forward looking reading indicators," Julia Wang, Greater China Economist at HSBC, told CNBC.

Analysts across the board have downgraded their assessments of the pace of recovery for China, with most expecting a moderate rather than significant rebound in the second quarter, she noted.

More stimulus measures seem a done deal, with HSBC pricing in swift and aggressive action in the near term.

"We're looking for bigger and faster moves... another 50 basis point cut to RRR in coming weeks," Wang said.