Economic growth slowdown may continue in May

China's economy may continue to slow in May as its manufacturing sector is expected to deteriorate at a faster rate, given a significant contraction in new orders and exports, HSBC Holdings PLC said on Thursday.

HSBC's preliminary purchasing managers' index for May, which indicates operating conditions in the manufacturing industry, slipped to 48.7 - the lowest reading this year - from April's 49.3, meaning that economic growth may be threatened by more rapid cooling.

Qu Hongbin, HSBC's chief economist in China, expected Beijing to deliver more aggressive policy easing to maintain stable economic growth, following disappointing economic data in April

"The government has been stepping up easing efforts to stabilize growth, including boosting liquidity, public housing, infrastructure investment and consumption," Qu said.

"As long as the impact of these measures filters through, China should secure a soft landing in the coming quarters."

HSBC's survey was based on questionnaire replies from more than 420 manufacturing companies. A reading below 50 means contraction while one above 50 shows expansion.

The sub-index of new export orders sharply deteriorated in May, dropping to 47.8 from 50.2, with eurozone contractions set to deepen and the US economy likely to decelerate in the second quarter, according to the HSBC report.

Meanwhile, the sub-index of total new orders also weakened to 48.4 this month, compared with 49.7 in April.

"The domestic and overseas economic situation is much more complicated than we expected, adding difficulties to predicting macroeconomic policy adjustment in the coming months," said Pan Jiancheng, deputy director-general of the China Economic Monitoring and Analysis Center under the National Bureau of Statistics.

Pan said this month's economic indicators will play a crucial role in determining policymakers' next steps.

On Wednesday, the State Council stressed that more policies are required to stabilize growth and boost domestic demand.

The supportive policies may include additional tax cuts, especially for small business, and encouraging private investment in railways and urban infrastructure.

According to the HSBC survey, the sub-index of input prices dropped to 48.3 after three consecutive months of above-50 readings. The sub-index of output prices reached a four-month low of 47.5, showing that inflationary pressures had continued to ease.

HSBC's Qu said easing inflation meant that a more aggressive policy loosening was required.

The People's Bank of China may further reduce the reserve requirement ratio in June after a cut of 50 basis points on May 12, HSBC said.

"We expect a 25 basis point interest rate cut around the middle of the year once inflation slows to below 3 percent."

Zhang Zhiwei, chief economist with the Nomura Securities Co Ltd, said that fiscal stimulus was around the corner.

"To judge whether fiscal stimulus can revert the weakening macro trend, we need to watch for confirmatory signals such as new loans and new fixed-asset investment projects."

He expected to see fiscal stimulus in the second half of this year.