May plant output up, snapping recent lull

China's factory activity in May expanded for the first time in three months, driven by an upturn in production and other factors, a private survey showed on Thursday.

Meanwhile, as manufacturers in China still face pressure and difficulties such as weak demand, a more challenging external environment and slumping profits, there is a need for more policy stimulus measures to boost domestic demand and stronger support for smaller businesses, analysts said.

The Caixin China General Manufacturing Purchasing Managers' Index — which gauges operating conditions in the sector — rose from 49.5 in April to 50.9 in May, showing signs of improvement in the area, media group Caixin said on Thursday.

A PMI reading above 50 signifies expansion, while one below 50 signals contraction.

Wang Zhe, a senior economist at Caixin Insight Group, said the manufacturing PMI returned to expansionary territory as both supply and demand improved in May.

The Caixin report showed that the subindex for manufacturing output grew significantly in May, logging the highest level since June 2022. The gauge for total new orders recorded the second-highest reading since May 2021 as surveyed businesses reported more clients and demand.

Caixin said external demand remained stable in May, with the subindex for new export orders rising marginally.

Referring to the 12-month outlook for output, manufacturers polled by Caixin remained optimistic. However, business confidence for the coming 12 months slipped to a seven-month low in May, though it remained above 50.

Meanwhile, firms maintained a cautious approach to hiring, with the subindex for employment shrinking in May at the fastest rate since February 2020.

Despite the improvement in China's factory activity, Wang said China's manufacturing sector experienced a patchy recovery.

"The divergence points to the fact that current economic growth lacks internal drivers and that market entities lack sufficient confidence, highlighting the importance of expanding and restoring demand," Wang added. "Currently, stabilizing employment, increasing incomes and bolstering expectations through a proactive fiscal policy should be prioritized given the dire job market and mounting deflationary pressure."

Data released by the National Bureau of Statistics on Wednesday offer the latest official snapshot of the rising pressures facing the economy, as the official PMI for China's manufacturing sector fell to 48.8 in May from 49.2 in April.

The country's official composite PMI, which includes both manufacturing and nonmanufacturing activity, came in at 52.9 in May compared with 54.4 in April, the NBS said.

Zhao Qinghe, a senior NBS statistician, said Chinese businesses came under pressure in May, and more efforts should be made to consolidate the foundation for economic recovery.

While China is on track for recovering with improvement in some key economic indicators like consumption, insufficient demand remains the key problem facing the continued recovery trend as well as the operation of enterprises, said Wang Yiming, vice-chairman of the China Center for International Economic Exchanges.

Wang called for enhancing support to spur consumption and boost consumer confidence.

Notably, Wang mentioned that private firms, which are mainly small firms, play a key role in providing most urban employment in China, and more efforts should be made to increase support for hard-hit enterprises, including further easing burdens for micro and small businesses and boosting financial support.

Wang's views were echoed by Li Xiaochao, former deputy head of the NBS, who highlighted the necessity for near-term policies to strengthen consumption and avoid the risk of a downward spiral.

Li said it is advisable for the government to step up macroeconomic policy support to shore up growth, including monetary policy easing.