China's factory activity slows slightly

·2-min read

China's factory activity slowed slightly in May as raw materials costs grew at their fastest pace in more than a decade, weighing on the output of small and export-oriented firms.

The official manufacturing Purchasing Manager's Index (PMI) inched lower to 51.0 in May, against analyst expectations that it would remain unchanged from April at 51.1, data from the National Bureau of Statistics showed on Monday.

The official PMI, which largely focuses on big and state-owned firms, has stood above the 50-point mark that separates growth from contraction for more than a year.

While the Chinese economy has largely shaken off the gloom from the COVID-19 pandemic, offficials warn the foundations for the recovery are not yet secure amid problems such as higher raw material costs and the pandemic situation overseas.

A sub-index for new export orders stood at 48.3 in May, down from 50.4 in the previous month and slipping sharply into contraction.

A sub-index for raw material costs in the official PMI stood at 72.8 in May, up from April's 66.9 and hitting the highest level since 2010.

Prices for commodities such as coal, steel, iron ore and copper have surged this year, fuelled by post-lockdown recoveries in demand and easing liquidity globally.

China's policymakers have repeatedly expressed concern about rising commodity prices in recent weeks and called for stricter management of supply and demand and to crack down on "malicious speculation."

As well as surging raw material prices, Chinese factories are struggling with high shipping costs and an appreciating Chinese currency.

Some are able to pass on the higher costs to overseas customers, while some small firms are stopping taking orders to avoid losses.

A sub-index for the activity of small firms stood at 48.8 in May, sharply down from April's 50.8.

Firms continued to lay off workers and at faster pace, the official data also showed.

In the services sector, activity expanded for the 15th straight month, and at a faster pace, with the non-manufacturing PMI index rising to 55.2 from 54.9 the month before.

China posted a record 18.3 per cent growth in the first quarter, but analysts expect the brisk expansion to moderate later this year.

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