China’s Caixin PMI Dips Below 50 for First Time in 11 Months

A private gauge of Chinese manufacturing fell back into contractionary territory in May, adding to recent evidence that the economy’s strong start to 2017 is leveling off.

• Caixin Media and Markit Economics manufacturing purchasing managers’ index fell to 49.6 from 50.3 in April, the lowest reading since June 2016 and below the 50.1 median estimate
• Output fell to 50.2 vs 51 in April
• Numbers below 50 indicate deteriorating conditions

The private measure — with a smaller sample size — contrasts with the government’s PMI reading released Wednesday, which indicated manufacturing was steady last month. The official report also suggested China’s factory recovery was spreading to the smaller and nimbler private sector as price pressures on them abate.

China’s policy makers are walking a tightrope as they seek to rein in excessive leverage in parts of the financial system while ensuring there’s enough credit flowing to the real economy to keep growth humming. While economists project expansion will slow from 6.9 percent in the first quarter, they also expect it to exceed the government’s 6.5 percent goal.

“We should not under-estimate the senior leadership’s desire to contain financial leverage and risk, efforts on which have only just begun, even if it may lead to slower credit and economic growth,” UBS Group AG economists, led by Hong Kong-based Wang Tao, wrote in a report. “However, given the need to meet other government priorities, most notably growth stability, we expect the government to constantly adjust the pace and magnitude of its supervisory tightening to strike a delicate balance.”

The decline signaled a “marginal deterioration in operating conditions” and coincided with slower increases in output and new orders, Caixin said in a statement. Staff numbers were cut at a quicker rate and subdued demand underpinned a drop in purchasing activity.

The report adds to evidence that growth may have already peaked this year amid other signs of fading momentum from satellite images to metal prices, says Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing.

“Input and output price gauges both fell below the 50 mark, adding to the evidence that China’s factory reflation story is over,” Orlik said in a note.