Overall Chinese business activity growth weakens for the second month in a row in May

May survey data indicated that overall Chinese business activity growth weakened for the second month in a row. Official purchasing managers’ indices tracking activity in China’s manufacturing and non-manufacturing sectors and independent indices for manufacturing and services published by Caixin highlight the tensions facing China as it seeks to transition to a growth model less dependent on construction and manufacturing.

Caixin China Composite PMI data released earlier today (which covers both manufacturing and services) remained in an expansionary territory during May. However, the Composite Output Index which posted at 50.5, down from 50.8 in April, signalled the slowest rate of expansion in the current three-month sequence of growth. 

Caixin's services PMI eased to a three-month low of 51.2, from 51.8 in April, marking the second consecutive monthly decline. All of the index categories, with the exception of output prices, which remained stable, showed signs of deterioration. Moreover, business optimism slid to its lowest level so far this year, Caxin said. Data underscored worsening conditions in both the manufacturing and services sectors. 

Today's Caxin report echoed similar declines to the government's official gauge that was released earlier this week. The official May manufacturing Purchasing Managers' Index (PMI) came in at 50.1, unchanged from April, while Caixin manufacturing PMI index slipped to 49.2 in May from April's 49.4 reading, remained in contraction for the 15th consecutive month. China's official services PMI fell from 52.5 in April to 52.0 in May.

Markets showed muted reaction to data, with the benchmark Shanghai Composite closing down 0.5 pct at 2,938.68 points and the yuan flat at around 6.58 per dollar. Over the past year, PBoC has unleashed a flurry of interest rate cuts and RRR reductions for banks, as well as other stimulus efforts, but strategists widely agree that more support is needed to bolster overall economic momentum. 

"The government needs to continue to push forward stabilizing measures to help the economy recover. It should also relax the control and regulation of the services sector to enable it to realize its growth potential and to facilitate the transformation and healthy development of the economy,” said Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis, at CEBM Group.