China’s Factories slow to respond to Stimulus, South Korea Exports Dive

China’s manufacturing sector showed scant signs of picking up in May as demand stayed stubbornly weak, while exports in South Korea suffered their biggest annual drop since the global financial crisis, grim readings which prompted calls for bolder stimulus measures.

Japanese manufacturers, however, saw a rebound in new orders while Indian factories enjoyed solid domestic demand, offering a glimmer of hope for a region struggling to gain traction in the second quarter.

The focus now shifts to the United States and parts of Europe, where hopes are pinned on stronger factory activity to offset the global downdraft from China.

China reported on Monday its official manufacturing Purchasing Managers’ Index (PMI) edged up to 50.2 in May, from 50.1 in April and creeping back into expansion territory.

But a private survey focusing on small and mid-sized firms showed their activity had contracted for a third straight month. The final HSBC/Markit PMI stood at 49.2.

Both indexes are hovering around the 50 level that is supposed to mark the threshold between contraction and expansion, pointing to very subdued activity at best. And both showed a further contraction in export orders were prompting factories to shed more workers.

A separate survey showed growth in China’s services industry cooled in May, with the non-manufacturing PMI slipping to 53.2, from 53.4. Services have been the lone bright spot in the economy.

“Overall, in our view, there are not yet convincing signs of near-term stabilization in the economy,” analysts at Barclays wrote in a note to clients.

“We believe risks to the outlook remain to the downside, with the property market correction and government-led infrastructure projects holding the key for the outlook.”

Indeed, the result is unlikely to cheer Beijing, which has already cut interest rates three times in six months and is widely expected to ease policy further in coming months.

“Five months into 2015, the economy sees little sign of a pick-up,” HSBC economists said. “We forecast more aggressive policy easing, including a 50-basis-point reserve ratio cut in the coming weeks.”

The sluggish performance in China and uneven demand globally has dragged on other trade-reliant Asian economies.

Data on Monday showed South Korea’s exports in May posted their worst annual fall in nearly six years, with declines in sales to all of its top markets – China, the United States and the EU. A separate PMI survey South Korean manufacturing activity shrank for a third straight month in May to 47.8, its lowest since August 2013, from 48.8 in April.

“There are several one-off factors but the weak export figures and the persisting weakness in other recent indicators support our view that the Bank of Korea will have to cut interest rates soon,” said Park Sang-hyun, chief economist at HI Investment & Securities.


The picture in neighboring Japan appeared to be slightly better, with the Markit/JMMA final PMI reading at 50.9 in May, up from 49.9 in April.

Yet, data on Friday showed Japanese household spending unexpectedly slumped in April and consumer inflation was roughly flat.

The patchy performance has cast doubts on the central bank’s forecast for a slow and steady economic recovery and has instead reinforced expectations it will have to pump more stimulus into the economy later in the year.

India saw the most upbeat result in the region, with its PMI expanding to 52.6, from April’s 51.3, surpassing forecasts.

The survey came on the back of figures on Friday that showed India’s economy grew 7.3 percent in the fiscal year 2014/15, expanding faster than China for a second consecutive quarter.

Still, there are doubts over the reliability of the data, with many economists believing that changes made earlier this year to the way government statisticians calculate GDP may have distorted the macroeconomic view.

That scepticism, along with benign inflation, have kept alive expectations for another quarter point cut in the benchmark rate to 7.25 percent on June 2, which would be the Reserve Bank of India’s third cut this year.

Source: Reuters

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