China May HSBC flash PMI Hits 7-Month Low on Weak Demand

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China's factory activity shrank for the first time in seven months in May as new orders fell, a preliminary survey of purchasing managers showed, adding to concerns that a recovery in the world's second-largest economy is sputtering.

The flash HSBC Purchasing Managers' Index for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October. The final HSBC PMI stood at 50.4 in April.

A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting China's domestic economy is not strong enough to offset soft external demand.

"The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds," said Qu Hongbin, chief China economist at HSBC.

The survey also showed new export orders hovered below the 50-point level in May, though the rate of decline slowed from April.

Still, the weak showing implied foreign demand remained lethargic due to a patchy U.S. recovery and Europe's nagging debt crisis, and echoes weak export momentum seen in Taiwan and South Korea in May.

"A sequential slowdown is likely in the middle of the second quarter, casting downside risks to China's fragile growth recovery," Qu added.

China posted lackluster data for industrial output and investment in April after an unexpected economic slowdown in the first quarter, raising fears of a feeble recovery in coming months.

Reflecting the cooling activities in the vast factory sector, both indices for input and output prices stayed muted in May to be near troughs seen in the third quarter last year.

An employment sub-index pulled back slightly again in May though local media reports suggest China's job situation is still holding up this year.

The HSBC flash PMI comes a week before the final reading and should reinforce market expectations that an economic recovery this year would be modest, if one is seen at all.

Following the underwhelming data in April, some analysts have slashed their forecasts for China's 2013 economic growth towards 7.5 percent from initial predictions closer to 8 percent.