Factory activity shrank in China in May, according to data released by the National Bureau of Statistics on Friday. The official purchasing manager’s index (PMI) dropped to 49.5, following two months of expansion. (A number below 50 represents a contraction). The figure also came in below expectations, as economists forecast an expansion last month.
Zhao Qinghe, a senior statistician from the NBS, attributed the decline to “insufficient effective demand,” as well as a high base of comparison from earlier rapid expansion.
The drop in factory activity came even as Chinese exports returned to growth in April, implying that a drop in May factory activity could be due to weaker domestic demand.
Chinese officials are exploring ways to boost consumer demand and local manufacturing, including a “cash-for-clunkers” scheme that offers subsidies for households to trade in old cars and appliances for newer models. Factories, too, can also get support to upgrade their equipment.
Friday’s disappointing data could reinvigorate debate about the speed and direction of Chinese stimulus, as Beijing tries to revive the economy and keep on track to hit its 5% GDP growth target.
Earlier this week, the International Monetary Fund raised its growth outlook for China, projecting 5% growth for 2024 and 4.5% for 2025. Both those projections are 0.4 percentage points higher than the fund’s April projections. China posted a growth of 5.3% for the first three months of this year according to data from the National Bureau of Statistics, which puts it on track to meet its growth target of around 5% this year.
More support needed
Yet the IMF warned that more support is needed to resolve the housing crisis, and that further measures are necessary to “help support higher consumption.” The international institution also focused on China’s support for individual sectors, noting that such measures could “lead to a misallocation of domestic resources and potentially affect trading partners.”
China recently unveiled new measures targeting the country’s years-long property slump, which is also weighing on consumer sentiment. China has tried to juice the sector with measures like lower down-payments and mortgage rates, and has offered around $42 billion to help state-owned enterprises buy up unsold apartments.
Still, analysts and economists worry that this rescue package will not be enough to revive the real estate sector. Fixing things will “likely require significantly more funding than available thus far", Goldman Sachs economists suggested earlier this month. The investment bank earlier estimated that $1.1 trillion would be needed to get inventory back to 2018 levels.
