China’s latest manufacturing data paints a very mixed picture about the health of its economy. Both domestic and external demand are weak, and although state-owned enterprises are hanging in there, crucial small- and medium-sized companies are struggling to find customers.
HSBC/Markit’s revised Purchasing Managers’ Index (pdf) fell in May to 49.2, down from 50.4 in April and lower than analyst expectations of 49.6. (A figure below 50 indicates the sector is shrinking.) By contrast China’s official PMI for the month was 50.8, up from 50.6 in April, which was better than expected. The difference is telling: The official figure includes more the giant state-owned enterprises, while HSBC polls smaller, independent firms.
Where details differ, the message does not: China’s economy has lost crucial momentum. Hongbin Qu, HSBC’s chief China economist, said the government needs to boost domestic demand to avoid a further drop in manufacturing activity in the coming months. “The new leaders should strike a delicate balance between reform and growth,” he said. But as Quartz has explained, there’s not much more that Beijing can do to stimulate growth without further inflating sectors like real estate. What’s more, structural reforms to rebalance the economy away from SOEs and toward more consumer consumption will incur a sharp short-term cost in economic growth.
External demand, which is the only viable miracle pill for China’s vast and sputtering manufacturing sector, is not looking good. Without a sustained recovery in crucial export markets—the European Union, US and Japan—China’s prospects are unlikely to improve much. Analysts expect China to remain more or less stable, but it is unlikely to recover in isolation.
HSBC’s China services PMI will be released on June 5. Given that services account for about 45% of gross domestic product, it will be watched closely.