China manufacturing index at 6-month high but strains remain

China's official manufacturing index hit a six-month high in May but the industry still faces multiple strains, the government said Monday, while a closely watched private survey pointed to continued deterioration as the world's second-largest economy battles a broad slowdown.

The Purchasing Managers' Index (PMI) released by the National Bureau of Statistics (NBS) came in at 50.2 for May, the strongest since 50.3 in November and the third consecutive month of expansion.

The index, which tracks activity in factories and workshops, is seen as a key barometer of the country's economic health. A figure above 50 signals growth, while anything below indicates contraction.

Despite the improvement in the headline figure, Zhao Qinghe, a senior analyst with the NBS, cautioned that it remained at a "relatively low level" and that industry is still "under rather big downward pressures".

"The survey result showed that companies are still beset with strapped finances, insufficient market demand and rising labour costs," Zhao said in a separate statement released by the NBS.
Sub-indexes covering production and new orders both expanded, while those for employment and raw material inventory remained below the break-even point, according to the NBS.

A separate survey by British banking giant HSBC was more pessimistic, with its final PMI reading standing at 49.2 in May for the third straight month of contraction.

Compared with the official reading, the HSBC survey uses a smaller sample.

According to the survey, production contracted for the first time in 2015 partly due to a fall in new export work, which was the sharpest in two years, according to the bank's statement.

"The headline PMI signalled a further deterioration in the health of China's manufacturing sector in May," said Annabel Fiddes, an economist at Markit, the information services provider that compiles the index, said in the statement.

Softening demand, falling output, sustained job cuts, ongoing destocking activities and reduced purchasing activity all suggest that the sector may "remain in contractionary territory as we head into mid-year", she said.

"More stimulus measures may be required to help boost domestic demand and recover some growth momentum," she added.

China's gross domestic product expanded 7.4 percent last year, the slowest since 1990. Growth weakened further to 7.0 percent in the January-March period, the worst quarterly result in six years.

The frailty looks to have extended into the current second quarter after indicators for April such as trade and industrial output came in weaker than expected.

Authorities have taken a series of steps to stimulate the economy, including three interest rate cuts since November and two reductions in the amount of cash banks must keep in reserve, in a bid to boost lending.