China May HSBC PMI at 49.2, Worst Since October

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China's factory activity shrank for the first time in seven months in May as both domestic and external demand softened, a private survey showed, adding to concerns that the world's second-largest economy is losing momentum.

The HSBC/Markit Purchasing Managers' Index (PMI) for May slipped to 49.2, the lowest level since October 2012 and down from April's final reading of 50.4.

The figure also was slightly lower than a preliminary reading of 49.6 released on May 23. Fifty divides expansion from contraction.

"The downward revision of the final HSBC China Manufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions," said Qu Hongbin, chief China economist at HSBC.

The reading adds to evidence in recent weeks that China's economy is losing growth momentum, although the Chinese government's official PMI, released on Saturday, ticked up to 50.8 in May from April's 50.6. The official survey focuses on bigger and state-owned firms.

The IMF and OECD last week cut their forecasts for China 2013 economic growth to 7.75 percent and 7.8 percent, respectively.

In the PMI, compiled by UK-based Markit Group Ltd, the sub-index for total new orders dipped to 48.7, the first time it has retreated below 50 since last September, suggesting weaker demand from domestic firms.

The survey, which covers more smaller and private-sector manufacturers than China's official PMI, also showed the new export orders sub-index fell for the second consecutive month below 50, implying lethargic external demand due to a patchy U.S recovery and Europe's nagging debt crisis.

"With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labour market," said Qu.

Most economists believe Beijing will refrain from big-bang stimulus this time as long as the labour market is holding up well, as employment is crucial for social stability.

The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing room to deliver reforms to the economy to reduce its reliance on exports.

However, some economists believe that Beijing may miss its own growth target this year.

"The new leaders should strike a delicate balance between reform and growth," Qu added.