China Factory Activity Holds Steady in May -- Update

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A gauge of manufacturing activity in China held steady in May as the property market remained buoyant, signaling stronger-than-expected economic momentum in the second quarter.

China's official manufacturing purchasing managers index was 51.2 in May, unchanged from April, according to the China Federation of Logistics and Purchasing, which releases the data with the National Bureau of Statistics. The May reading released Wednesday beat a median of 51.0 forecast by economists polled by The Wall Street Journal.

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The index, closely watched as a gauge of business sentiment, has remained above the 50 mark that separates expansion from contraction for 10 consecutive months. May subindexes were mixed, with export activity slightly up, new orders holding steady and production edging down from April levels.

Economists said the May manufacturing PMI points to an economy slowing less rapidly than expected. "The first quarter was the peak, and April declined only slightly," said Mizuho Securities Asia Ltd. economist Jianguang Shen, who expects China's growth to weaken significantly in the second half of the year. "The government is trying to tighten the housing bubble, but it's been careful not to overtighten."

Beijing's strategy in recent months of imposing strict administrative restrictions on property sales in China's largest cities while trying to encourage sales in smaller, overbuilt cities is paying early dividends, economists said, allowing the economy to weaken at a gradual pace.

May's stronger-than-expected PMI data also suggests that recent regulatory tightening hasn't yet affected the real economy, said Zhang Yiping, an analyst with China Merchants Securities Co. He predicts second-quarter growth will slow to around 6.7%, from 6.9% in the first quarter. "But it won't be as bad as many expected," he said.

China has been increasingly willing to tap the monetary, fiscal and administrative brakes to stem rising debt and stave off financial instability after relatively strong first-quarter growth, which left it more confident it could meet its 2017 growth target of about 6.5%, Mr. Shen said.

Those likely to feel the slowdown first include commodities, steel, cement, glass and related sectors, economists said. Profits in the mining, chemicals and building materials industries already started slipping in April.

Baotou Julong Group, a private mining company based in the northern city of Baotou, said prices for its iron ore have declined 10% since their March peak, denting the company's bottom line.

"If prices drop further, we'll have to cut investment spending. And if they fall below our costs, we could stop producing altogether," said company Vice President Huang Zhiguo. "With slumping demand, many of our workers could lose their jobs, and up to 700 families could face real trouble."

China's official nonmanufacturing PMI, which includes services and other activity away from the factory floor, ticked up to 54.5 in May from 54.0 in April as consumption remained strong.

Moody's last week downgraded China's government debt, its first such move in nearly three decades, amid concern that slowing growth will make it more difficult for China to repay its debt in coming years.

Economists point to other signs of a gradual slowdown, including growing iron-ore inventories at seaports, reduced coal consumption in month-on-month terms and gradually decelerating property sales.

"Together with rising rates and financial market uncertainty, this raises the risk of softer economic activity," Citibank said in a report.

Liyan Qi and Grace Zhu contributed to this article.

Write to Mark Magnier at

(END) Dow Jones Newswires

May 30, 2017 23:24 ET (03:24 GMT)