China’s factory activities expand at slightly slower pace in May, as raw materials costs surge

China’s factory activities expanded at a slower pace in May, official data showed on Monday, as rising raw material costs weighed on industrial production.

The official manufacturing Purchasing Managers’ Index (PMI), a key gauge of manufacturing activities, came in at 51 in May, edging down from last month’s 51.1, according to the National Bureau of Statistics (NBS).

It was also below a median forecast of 30 economists polled by Reuters who estimated the PMI would remain at 51.1. A reading above 50 indicates expansion in activities, while a reading below reflects contraction.

“The moderation in manufacturing PMI was mainly led by its new orders and raw materials inventory sub-indices,” Lu Ting, chief China economist at Nomura, told CGTN.

The two indexes dropped to 51.3 and 47.7 respectively in May from 52.0 and 48.3 in April, and more than offset the rise in the production sub-index to 52.7 from 52.2, Lu noted.

The export order index fell into contraction territory, standing at 48.3 and 2.1 percentage points lower than last month. It reflected a decline in foreign trade in the manufacturing sector, said Zhao Qinghe, a senior NBS statistician.

Lu echoed Zhao, saying that the significant drop in the new orders sub-index suggested weaker sequential momentum in the country’s export. He expected weaker exports in the second half of the year.

The purchasing price index for raw materials was 72.8 percent in April, and the ex-factory price index sat at 60.6 percent, up 5.9 percentage points and 3.3 percentage points from April, respectively. Both indexes were the highest in a year.

Prices for commodities such as coal, steel, iron ore and copper have surged this year, and Beijing has been increasingly concerned about runaway commodity prices in recent weeks.

Lu expects the rapid rise in raw material prices to dent demand soon for two major reasons: higher prices mean less real demand; surging raw material prices mean higher costs and squeezed margins for firms in downstream sectors, constraining their production and causing some supply chain disruptions.

“Despite recovering demand from the U.S. and Europe, many factories had to turn down new orders to minimize their profit loss. It was particularly difficult for small producers as their financing cost is higher than larger ones,” Wang Dan, chief economist at Hang Seng Bank China, told CGTN.

NBS data showed that the production and operation of small enterprises have contracted in May. The PMI of small enterprises surveyed narrowed down to 48.8, two percentage points lower than last month, whereas the PMI of large and medium-sized enterprises expanded by 0.1 and 0.8 percentage points from last month, respectively.

“With such rapid price increase in raw materials, many of them had to halt production or shut down. The drop in supply may aggravate the inflation pressure that already existed in the United States,” Wang said.

China’s non-manufacturing PMI rebounded slightly to 55.2 in May, 0.3 percentage points higher than the April figure, according to NBS.

Wang said the services sector saw stronger recovery in May, lifted by the Labor Day holiday. “The construction sector, mainly housing, saw particularly strong expansion with rising new orders and new hires. We expect that housing market will remain the pillar for domestic demand in 2021.”

The rebound is “led mainly by the construction sector, as the government may speed up its fiscal spending on infrastructure investment thanks to the rapid accumulation of fiscal deposits in previous months and warmer weather conditions,” Lu echoed Wang.

Zhao, an NBS statistician, said the business activity index among transportation, accommodation, retails, catering and entertainment industries, which were severely constrained by the COVID-19, has been significantly recovered.

“The sub-index for the services sector remained elevated in May, despite moderation from April, in line with the hospitality sector’s solid recovery during the Labor Day holiday in early May,” Lu said.

The official May composite PMI that includes both manufacturing and services activities rose to 54.2 from April’s 53.8, showing a steady expansion trend for the overall production and operation activities of Chinese enterprises.

China’s economic growth quickened at a record pace of 18.3 percent year on year in the first quarter, driven by stronger demand at home and abroad. But it moderated in April, as retail sales and industrial output slowed.

“We expect increasing downward pressure on growth in the second half, especially in the fourth quarter of this year, as pent-up demand subsides and exports weaken,” Lu said.

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