China's official PMI retreats more than expected in May

China's official purchasing managers' index fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, in the latest sign that output in the world's second-biggest economy is cooling.

Economists polled by Reuters had expected the official PMI, which captures activity in the biggest factories in the country - many of them state-backed - to retreat to 52.2 for May, from 53.3 in April.

Smaller private-sector firms are already struggling, according to the preliminary reading of HSBC's rival China Manufacturing PMI, which showed factory output contracting for a seventh month in a row. The final index level for May is due at 0230 GMT on Friday.

Although Beijing has announced a raft of reforms to support growth and unlock private investment since mid-May, it is too early for the PMI data to reflect those efforts.

"What's really worrying is new orders have started to shrink and inventories have started to build up at an unusually fast pace," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said.

"The output index also fell sharply, it is still positive but only mildly positive, so it means that the current activity is very weak. And it will get even weaker because people have already built up inventories so they don't need to produce to meet orders - and those orders are shrinking anyway."

The Australian dollar, highly sensitive to news from its key export market, fell to an eight-month low after the data and the euro also slipped.
China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009. The latest Reuters benchmark poll has a consensus growth forecast of 8.2 percent for the full year, which would be the slowest annual expansion since 1999.

STIMULUS HOPES PLAYED DOWN

Although the official PMI in April was a 13-month high, economic data for the month was unexpectedly weak, alarming the central government as well as outside investors.

Many of those investors are hoping China will unleash a massive new stimulus package that will allow them to bet on China recovery plays and markets have gyrated wildly in recent weeks as speculation on stimulus has intensified.

The speculation has been fuelled by government steps in the past two weeks to fast-track about 1 trillion yuan in infrastructure and industrial projects.

A chorus of comment from influential academics in state-backed newspapers this week has also sought to play down expectations that any programme would seek to replicate a 4 trillion yuan stimulus package during the global financial crisis.

Unleashed in response to the 2008-09 global financial crisis, it left in its wake a 10.7 trillion yuan mountain of local government debt and helped push consumer price inflation to a three-year peak amid a frenzy of real estate speculation.

Beijing has only just brought inflation under control, helping explain why growth is being sacrificed short term. Analysts cite a two-year long programme of property curbs as the main reason why China's economic growth in 2012 will be the slowest since 1999.

In order to avoid a second build-up in local government debt, China will allow private capital to help finance many of these projects, particularly in rail and energy and natural gas distribution.

Meanwhile the central bank has cut 150 basis points (bps) from bank reserves in three moves since November 2011, bringing the rate down from a record high of 21.5 percent.

Analysts polled by Reuters in May, shortly after the latest cut, expected another 100 bps of cuts this year.

Copyright Thomson Reuters 2012