China factories seen growing at slowest pace in eight months in May

A labourer works at a steel factory in Dalian

BEIJING (Reuters) – Factory activity in China is expected to have grown at its slowest pace in eight months, a Reuters poll showed, as previous stimulus fades and policymakers focus on tackling rising debt – a sign the cooldown in manufacturing will persist through 2017.

The manufacturing sector is also losing a tailwind from rising producer price inflation, which helped fuel strong industrial profits but is now coming off from more than five year highs.

The official manufacturing Purchasing Managers’ Index (PMI) is expected to come in at 51.0, which would be the lowest reading since September albeit the tenth straight month of growth, according to a median forecast of 30 economists in the Reuters poll.

In April, the PMI was 51.2, down from March when the index rose to its highest level in nearly five years.

Analysts expect overall economic growth to continue to slow for the rest of the year, as authorities tighten regulations to deter risky lending and pull back on the stimulus that helped the economy get off to an unexpectedly strong start this year.

The world’s second-largest economy grew a faster-than-expected 6.9 percent in the first quarter, boosted by higher government infrastructure spending and a gravity-defying property boom.

But growth appeared to lose steam in April, with producer price inflation falling, export growth weakening and investment and industrial output missing expectations.

Massive debt – standing at nearly 300 percent of GDP – and serious budgetary imbalances mean Beijing can’t carry on pump priming, which analysts expect will eventually drag on growth during the year.

Indeed, Moody’s Investors Service lowered China’s sovereign credit rating this week on expectations the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

Chinese officials and state media have said the debt problem is under control, and see the economy and reform efforts tracking in line with their expectations. China is targeting around 6.5 percent GDP growth this year.

“China’s economy is expected to maintain medium to fast growth this year,” an editorial in Communist Party mouthpiece People’s Daily said on Friday. “Development targets can be met and efforts will be made during the course of work to achieve even better results.”

The official PMI number will be released on May 31, along with the official services PMI.

The private Caixin/Markit PMI manufacturing survey, which focuses more on small and mid-sized firms, will be published on June 1. The Caixin/Markit PMI is expected to come in at 50.1 for May, according to a Reuters poll of economists, down from 50.3 in April.

(Reporting by Elias Glenn; Editing by Shri Navaratnam)