China May official factory PMI seen lackluster despite stimulus moves

By Reuters

May 28, 2015 06:05 AM EDT

China's factories struggled to expand in May despite recent interest rate cuts and other policy stimulus, a Reuters poll showed, suggesting the government may have to do more to halt a protracted slowdown in the economy.

The official manufacturing Purchasing Managers' Index, or PMI, is forecast to inch up to 50.2 from April's 50.1, according to the median forecast of 14 economists in the poll.

A reading above 50 points indicates an expansion in activity while one below that shows a contraction on a monthly basis.

"Although the government has unveiled a series of policy stimulus measures, the effect has yet to show up," said Nie Wen, an economist at Hwabao Trust in Shanghai.

The flash HSBC/Markit PMI released last week showed factory activity contracted for a third month in May and output shrank at the fastest rate in just over a year, indicating persistent weakness in the world's second-largest economy that requires increased policy support.

The private survey focuses on small and mid-sized firms, while the official one looks at larger, state-owned companies.

China's annual economic growth slowed to a six-year-low of 7 percent in the first quarter, and recent data showed a further loss of momentum heading into the second quarter.

Economists at HSBC lowered their forecast this week for China's 2015 GDP growth to 7.1 percent from 7.3 percent, and cut their export growth forecast to 4.2 percent from 7.1 percent.

"Weaker exports will weigh on corporate spending and sentiment. Meanwhile, policy easing is behind the curve, further cutting into investment growth," they said in a research note. Given weak conditions, HSBC has doubled down on its projections for further policy easing this year.

It now expects the central bank to cut interest rates two more times this year, by a total of 50 basis points (bps), and slash banks' required reserve ratio by a total of 250 bps in cuts to encourage more lending.

HSBC had previously forecast a further 25 bp cut in interest rates and 100 bps of RRR cuts for the rest of the year.

In a bid to spur growth and reduce borrowing costs, the central bank already has delivered three interest rate cuts since November, lowering the benchmark lending rate by 90 basis points, and cut bank reserve ratio by 150 bps this year.

Weighed down by a property downturn, factory overcapacity and high levels of local debt, China's economic growth is expected to slow to a quarter-century low of around 7 percent this year from 7.4 percent in 2014.

The PMI factory numbers will be released on Monday, June1, alongside the official services PMI and the final HSBC/Markit PMI.

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