China's factory output signals wider economic weakness

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China's factory output signals wider economic weakness

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There are signs of a broadening slowdown in China’s economy as surveys of its vast factory sector showed momentum eased in May.

The official purchasing managers’ index (PMI) – which covers China’s biggest, mainly state-backed firms – fell more than expected last month.

The reading was the weakest this year, with output at its lowest since November 2011, signalling a deeper-than-forecast deterioration in demand at home and abroad.

“Growth in Q2 is likely to slow, probably below 7.5 percent year-on-year. That puts the annual growth target at risk and the risks continue to increase because the external environment is weakening,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

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.

A particular concern for economists was that new orders have begun to shrink while inventories have started to build, implying further softness in the months ahead as firms would meet any uptick in orders with production from existing stock, rather than increasing output.

Most worrisome for China’s ruling Communist Party is likely to be the employment risks. The Party is obsessed with maintaining stability ahead of a power transition that gets under way later this year, and in the past has intervened in the economy to preserve jobs and keep workers off the streets.

China’s annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8.0 percent since 2009.