China's manufacturing continues to slow in May with PMI decline

China's manufacturing activities continued to slow in May, with a key economic leading indicator falling to a nine-month low amid the government's efforts to curb soaring prices and cool the economy, according to the China Federation of Logistics and Purchasing (CFLP).

The Purchasing Managers Index (PMI) of the manufacturing sector, which measures manufacturing activities, dropped 0.9 percentage points month-on-month to 52 percent in May, extending the monthly decline to the second consecutive month.

The PMI figure was 52.9 percent in April, 53.4 percent in March, 52.2 percent in February and 52.9 percent in January.

A reading above 50 percent indicates economic expansion, while below 50 percent indicates contraction. China's PMI has remained above the boom-and -bust line for 27 consecutive months.

With regard to the sub-indexes, the purchase price index, which assesses the cost of raw materials, led the declines with a month-on-month drop of 5.9 percentage points in May, while the new orders index, backlog orders index and raw material inventory index all posted declines of more than 1 percentage point.

The CFLP data show that the new orders index, which reflects domestic demand, fell 1.7 percentage points from April to 52.1 percent in May.

"The continuous decline underlines that China's economy is more likely to slow down," Zhang Liqun, a researcher with the Development Research Center of the State Council, said in the CFLP statement.

"Furthermore, the sharp decline of the purchase price index suggests the inflationary expectations may ease," Zhang said.

Before the CFLP published the official PMI data, the market widely expected the reading to drop below 52 percent.

Analysts said the slowdown of economic growth and the decline of purchase prices would further test Chinese policymakers, who have endeavored to balance economic growth and control inflation.

Cai Jin, vice president of CFLP, said the 5.9-percentage point decline of purchase price index suggests the impact of rising commodity prices on domestic inflation may be weakening.

According to Cai, the Gross Domestic Product (GDP) growth matching the May PMI data was around 9 percent.

"All we need now is to prevent the demand growth from declining too excessively and leading to insufficient momentum to power the economy," he said.

Last month, Goldman Sachs revised down its forecast of China's GDP growth in 2011 to 9.4 percent from 10 percent previously, and 9.2 percent for 2012 from previous 9.5 percent.

China's GDP expanded 9.7 percent in the first quarter of 2011 from a year earlier, compared with 9.8 percent in the fourth quarter last year.

The central government has declared curbing soaring inflation its top priority this year and adopted a series of tightening measures to cool the economy, with an annual inflation control target of 4 percent.

The Consumer Price Index (CPI), a main gauge of inflation, rose 5.3 percent year-on-year in April.

Li Miaoxian, an analyst with the BOCOM International Holdings Co., Ltd., urged caution, saying it was too early to tell if imported inflationary pressure had eased as the drop in purchase prices was closely related to the adjustment of commodity prices on the global market in May.

"Commodity price fluctuations are expected in the future," Li said.

The National Bureau of Statistics will release the CPI data for May on June 14.

Wang Tao, chief economist for UBS Securities (China), predicted PMI to further slide to barely above 50 percent in June and the risks for PMI to fall below the boom-or-bust line are increasing.

Accordingly, China's GDP growth will slow to 8 percent quarter-on-quarter in the second quarter this year, or 9.5 percent year-on-year, she said.

Compared with the CFLP data, the HSBC China Manufacturing PMI, released previously on Wednesday, dropped to a 10-month low of 51.6 percent in May, higher than its preliminary reading of 51.1 percent published on May 23.

The HSBC survey covers 400 companies, while the CFLP's monthly PMI reports on the data of 820 companies across a range of sectors, including energy, metals, textiles, automobiles and electronics.