China Factory PMI Slump Worsens As Stocks Tumble Into Bear Market

Chinese stocks slid into bear market territory after manufacturing activity contracted for a second month in May. The dismal data is more evidence that the post-Covid recovery in the second-largest economy in the world is faltering. Bad data might suggest additional policy easing is needed to prop up economic growth. 

On Wednesday, the National Bureau of Statistics announced that China’s official manufacturing purchasing managers’ index had dropped to 48.8 in May, down from 49.2 in April. This was the lowest reading since December 2022 and missed the median estimate of 49.5 in a Bloomberg survey of economists. It also marked the second consecutive month the index printed sub-50. 

Meanwhile, China’s non-manufacturing PMI fell to 54.5 in May from 56.4 in April, also missing economists’ expectations. 

PMI data shows the post-Covid economic recovery is slowing after a surge in consumer activity earlier in the year after draconian lockdowns were lifted. Bloomberg noted:

Exports remain weak, a rebound in the property market has faded and the government has slowed spending on infrastructure. Businesses are also being hit by falling profits and heightened tensions with the US and its allies.

As of late, there appears to be no shortage of bad news for China’s recovery narrative: 

“This adds to indicators since April that suggest that the economic recovery momentum has continued to slow,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. 

Chen noted the bad news might lead to easier monetary conditions:

“There’ll be pressure for monetary policy support to be stepped up given the weak domestic inflation.”

Meanwhile, investors are losing faith in the recovery narrative as the Hang Seng China Enterprises Index dropped as much as 2.5% on Wednesday. The index stumbled into a bear market, down 21% since peaking on Jan. 27. 

To restore confidence in investors, Vey-Sern Ling, managing director at Union Bancaire Privee, said, “More stimulus from the government may help, but evidence of sustainable longer-term growth will be required to clear investors’ doubts.”

Dismal PMI data is having a negative impact on the market, but sliding stock and commodity prices over the last several months show investors have priced in the rocky recovery.

Besides a faltering recovery, geopolitical risks are another significant headwind.