China’s Factory Outlook Steadies as Recovery Passes Its Peak

(Bloomberg) — A gauge of China’s manufacturing industry steadied in May, suggesting the economy’s recovery momentum might have peaked. The services and construction sectors strengthened.

The official manufacturing purchasing managers’ index slowed slightly to 51 in May from 51.1 in the previous month, the National Bureau of Statistics said Monday, lower than the median estimate of 51.1 in a Bloomberg survey of economists. The non-manufacturing gauge, which measures activity in the construction and services sectors, climbed to 55.2, above the 55.1 projected by economists. Readings above 50 indicate an expansion in output.

The official manufacturing reading pointed to a stabilization in output, with the fewer working days in the month compared to April possibly affecting the results. External demand likely remained strong in May due to the reopening of some nations such as the U.S., but recent rapid increases in commodity prices are weighing on the profitability of companies, especially those that purchase raw materials like metal ores or coal.

The data confirms that “the pace of the economic recovery in China has been slowing,” Qu Hongbin, co-head of economics research at HSBC Holdings Plc, said in an interview with Bloomberg TV. “We are already past the peak of recovery momentum in China.”

A sub-index of new export orders for factories fell into contraction, down to 48.3 in May from 50.4 in the previous month, while new orders were at 51.3.

Growth momentum should continue into coming months. Still, the unevenness in the recovery is going to take time to work out and the emerging signs of weakness warrant some caution. Against this backdrop, the People’s Bank of China is unlikely to raise interest rates — even as price pressures build, said Chang Shu, chief Asia economist, Bloomberg Economics.

The service sector recovery has been recovering this year with further reductions in domestic travel restrictions releasing some pent-up demand such as a surge in Chinese travel over the May Labor Day holidays, which exceeded pre-pandemic levels. However, that pickup in domestic consumption is still lagging behind the pickup in the industrial sector.

The construction sector strengthened, reversing its decline from a peak in March. A sub-index of manufacturing employment was at 48.9, the same as non-manufacturing employment.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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