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China PMI drops again

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China PMI drops again

Index in contraction territory..

Operating conditions in China’s manufacturing sector continued to deteriorate in May, as companies signaled a renewed contraction of output as total new business fell for the third month running. Data suggested that weaker demand overseas was a key factor behind the latest fall in new business, as new export work declined at the steepest rate since June 2013.

 Meanwhile, deflationary pressures in the sector eased, with both input and output prices recording the slowest rates of deflation since August 2014. Adjusted for seasonal factors, the HSBC Purchasing Managers’ Index – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 49.2 in May. Although this was up slightly from 48.9 in April, the index remained below the crucial 50.0 neutral mark and signaled a third successive monthly deterioration in the health of China’s manufacturing sector. However, the rate of deterioration remained only slight.

"Sustained job cuts, ongoing destocking activities and reduced purchasing activity all suggest that the sector may remain in contractionary territory as we head into mid-year." 

May data indicated a renewed fall in Chinese manufacturing output, after production volumes stagnated in April. Although the rate of decline was only marginal, it was the first time that output had contracted since last December. Anecdotal evidence suggested that a softening in market conditions had dampened client demand. 

Furthermore, total new business placed at Chinese manufacturers has now fallen for three successive months. Data suggested that weaker demand from abroad was the main factor behind the latest reduction in new work. The latest fall in new export business was the sharpest in nearly two years.

Manufacturers tempered their production plans in line with fewer new orders in May, with purchasing activity falling for the second month in a row. Consequently, stocks of purchases fell in May, though the rate of depletion was only slight.

Employment at Chinese goods producers declined again in May, extending the current sequence of job shedding to 19 months. According to anecdotal evidence, lower production requirements and the nonreplacement of voluntary leavers led to reduced staff numbers. Meanwhile, backlogs of work rose fractionally over the month, after a slight reduction during April.

Annabel Fiddes, Economist at Markit, indicated that the current weakness may remain for some time. “The headline PMI signaled a further deterioration in the health of China’s manufacturing sector in May. A solid fall in new export work contributed to fewer new orders, which in turn led to the first contraction of output in 2015 so far.

“Furthermore, sustained job cuts, ongoing destocking activities and reduced purchasing activity all suggest that the sector may remain in contractionary territory as we head into mid-year. The latest survey data therefore suggest that more stimulus measures may be required to help boost domestic demand and recover some growth momentum.”

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