Divergent manufacturing data point to economic stabilization amid contraction pressure

BEIJING - While the official May manufacturing data added evidence to an overall picture of a stabilizing Chinese economy, a private survey has found warning signs of contraction.

The Caixin China General Manufacturing Managers' Index (PMI) slipped to 49.6 in May from 50.3 in April, according to the survey conducted by financial information service provider Markit and sponsored by Caixin Media Co. Ltd.

The Caixin PMI released Thursday was in contrast with the official manufacturing PMI, which came in at 51.2 for May, as a reading above 50 indicates expansion, while a reading below 50 represents contraction.

The official PMI, flat with April, indicates the 10th straight month of expansion, while the Caixin figure marks the first contraction in 11 months.

Caixin said manufacturers have reported softer growth in production, which reflected a relatively muted increase in total new orders during May.

Employment also declined at the quickest pace since last September, which was partly linked to downsizing by companies and non-replacement of those leaving voluntarily.

Weaker-than-expected sales weighed on purchasing, according to Caixin. As a result, inventory of inputs declined at the quickest pace since January.

The official PMI, which is released by the National Bureau of Statistics (NBS), samples 3,000 manufacturing enterprises in China. The Caixin PMI samples some 500 manufacturers and is relatively volatile due to its small sample size and less involvement of large enterprises.

Regional differences are also a cause of the divergence, as the Caixin sample may be skewed toward eastern coastal areas.

Caixin said China's manufacturing sector had "come under greater pressure" in May, citing Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin Insight Group, who believes that the economy is on a downward trajectory.

UBS China said in a research note that the official manufacturing PMI implies steady manufacturing activity momentum but also softer production, and the bank expects industrial production growth to have edged down in May.

The bank noted "signs of the current mini-cycle peaking" after a notable recovery in demand and corporate earnings, but it said the slowdown in economic growth has been very gradual and will likely remain so.

China's economy expanded by 6.9 percent in the first quarter, well above the annual growth target of around 6.5 percent. However, moderation in growth is also expected in the following quarters.

In a joint CEBM report released along with the data, Zhong said the slowdown in manufacturing has highlighted the need to promote the ongoing deleveraging and regulatory scrutiny in the financial sector, as short-term pains could bring steady medium-high growth in the long-run.

A strong start might have secured the full-year target of 6.5-percent growth, but "without any major technological breakthrough or structural improvement, deceleration in economic growth may come sooner than expected," the CEBM report said.

On the bright side, China's official non-manufacturing PMI quickened to 54.4 in May from 54 in April, according to the NBS.

The non-manufacturing sub-indices for new business orders and activity expectations came in at 50.3 and 59.2, respectively, indicating the industry will continue to grow relatively rapidly in the months to come, said NBS statistician Zhao Qinghe.

The non-manufacturing sector is gradually picking up steam as business confidence builds strength, said Zhao.

Caixin has yet to release its service PMI for May.