Service PMI hints slowdown in May

Chinese economic growth may have slowed in May, figures suggested on Monday.

Expansion of the country's non-manufacturing industries slowed to an eight-month low last month, indicated by a purchasing managers' index of 54.3, down from 54.5 in April.

The figures were reported by the National Bureau of Statistics and the China Federation of Logistics and Purchasing.

May's index remained above 50, indicating growth, but at a modest pace due to shrinking new orders.

Growth of new orders in May nearly stagnated, shown by a reading of 50.1, the lowest since November 2011. New orders in the service sector contracted for the second consecutive month to 49.2, compared with 49.8 in April, the official data show.

"Recent growth of the non-manufacturing economy is moderately fast, keeping to within a reasonable range," said Cai Jin, vice-chairman of the federation.

Franco Chong, general manager of Happy Lemon International Ltd, a teahouse chain in Shanghai, said growth of sales revenue has remained stable, while the service sector has been full of competition with every company trying to restructure with more attractive products and improved services.

As a rapid increase in the cost of materials and labor weakened profits growth, Chong said the company is planning to introduce new products more often to attract more consumers.

On Monday, HSBC Holdings PLC said its manufacturing PMI for May stood at 49.2, an eight-month low and down from 50.4 in April. "It signals the first deterioration in operating conditions in seven months, albeit at only a marginal pace," a report from the bank said.

The bank's figure compares with a higher-than-expected official PMI of 50.8 reported by the statistics bureau on Saturday, rebounding from 50.6 in April,

Sun Junwei, an economist at HSBC, said: "There was no meaningful improvement in China's manufacturing sector in May. Policymakers continue to face a tough challenge in striking an appropriate balance between the need to push through structural reforms versus the need to preserve near-term growth."

Differences between the official and HSBC PMI data were seen mainly because of the different sample sizes. The statistics bureau's survey covers more than 3,000 large and medium-sized enterprises, while HSBC has 430 manufacturing managers as respondents, most of them from small businesses.

Qu Hongbin, chief economist in China for HSBC, said: "With persisting external headwinds, the government needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labor market."

Wu Yue, manager of Shanghai Zaiwang Steel Co Ltd, said: "Most small and medium-sized steel companies are suffering their toughest period with the lowest profits earned in the past three years as overall market demand and the price for materials keep declining rapidly."

The company cut about 15 percent of its output to lower costs in April and is desperately awaiting a market recovery.

Without a meaningful improvement in new orders, production growth will probably lose steam in coming months, some economists said.

Chairwoman of global markets at JP Morgan Securities (Asia Pacific) Ltd, Jing Ulrich, said in Beijing on Monday that to some extent, the government may tolerate a relatively slower economic development.

JPMorgan has lowered its prediction for China's GDP growth to 7.6 percent this year. The growth rate in the first three months slowed to 7.7 percent from 7.9 percent in the fourth quarter of 2012.

Lian Ping, chief economist at the Bank of Communications, said weaker economic growth is the "necessary price" paid for structural reform.

"We are not pessimistic, although it shows weaker development momentum," Lian said.

Wang Tao, chief Chinese economist at UBS AG, suggested there will be no new stimulus policies from the government as credit growth so far is strong enough to continue to support investment and economic activities in coming months.