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China's manufacturing contracts in May

Manufacturing activity in China contracted in May for

Manufacturing activity in China contracted in May for the first time in seven months, HSBC said Thursday, in another sign of the weakness of recovery in the world's second-largest economy. Above, workers inside a clothing factory in Huaibei, China. (May 23, 2013) Credit: Getty

BEIJING - China's factory activity shrank for the first time in seven months in May as new orders fell, a preliminary manufacturing survey showed, entrenching fears that its economic recovery has stalled and that a sharper cool-down may be imminent.

The flash HSBC Purchasing Managers' Index for May fell to 49.6, slipping under the 50-point level that indicates expansion for the first time since October and sending Asian financial markets sharply lower. The index stood at 50.4 in April.

The lack of vigor in the world's second-biggest economy implies its ability to meet the government's 7.5 percent growth target this year is increasingly difficult, analysts said.

The soft data also sharpens Beijing's policy dilemma over whether to act to stabilize activity, or tolerate an orderly slowdown while focusing on reducing the country's dependence on exports and investment for growth.

Yao Wei, an economist at Société Générale in Hong Kong, said the debate favors policy inaction from Beijing for now, as long as economic growth remains above 7 percent. "We don't think it will trigger any cyclical policy move as long as the job market is fine," she said. "China is really on a path of structural [growth] deceleration."

The PMI survey suggested China is up against weakness both at home and abroad. A subindex measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting domestic consumption is not strong enough to offset soft global demand. U.S. stock markets were down after the report, but recovered most of their losses before the close.

Thursday's PMI revived investor worries about whether China can sustain an economic revival this year, after annual growth slumped to a 13-year trough in 2012.

If the economy meets the government's growth target and expands 7.5 percent this year, it would still be its worst performance in 23 years.

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