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Chinese factory activity contracts more than expected, official data show

Key Points
  • China’s National Bureau of Statistics released official manufacturing PMI for the month of May, which fell to 49.4 from 50.1 in April. Analysts polled by Reuters had expected the indicator to drop to 49.9 in May.
  • For China, the PMI is among economic indicators that investors globally watch closely for signs of trouble amid domestic headwinds and the ongoing U.S.-China trade dispute.
This photo taken on May 3, 2018 shows a worker cutting steel at a factory in Huaibei in China's eastern Anhui province. - China's surplus with the United States widened in April, underlining an imbalance between the economic titans as they struggle to reach an agreement on averting a potentially damaging trade war. (Photo by - / AFP) / China OUT (Photo credit should read -/AFP/Getty Images)
- | AFP | Getty Images

China's manufacturing activity contracted more than expected for in the month of May amid a bitter trade war with the U.S., Chinese government data showed on Friday.

The official manufacturing Purchasing Managers' Index (PMI) for May came in at 49.4, lower than the 49.9 economists polled by Reuters had forecast. April's reading was 50.1.

PMI readings above 50 indicate expansion, while those below that signal contraction.

The official non-manufacturing PMI for May was 54.3 — unchanged from April.

The PMI is a survey of businesses about the operating environment. Such data offer a first glimpse into what's happening in an economy, as they are usually among the first major economic indicators released each month.

For China, the PMI is among economic indicators that investors globally watch closely for signs of trouble amid domestic headwinds and the ongoing U.S.-China trade dispute.

"Obviously, the investor concern is now shifting from the sustainability of Chinese growth recovery to how fast the economy is slowing," said Jian Chang, chief China economist at Barclays Asia Pacific.

The most recent U.S. tariff hike "clearly played a role in driving down China's orders and demand and also consumer and business sentiment," Chang told CNBC's "Street Signs."

Barclays expects a long standoff in the bilateral trade fight, with the Chinese government being on high alert in rolling out policies to stabilize growth and sentiment, said Chang.

"The official PMIs suggest that growth remains under pressure, consistent with our view that there are still some downside risks to near-term activity," said Julian Evans-Pritchard, senior China economist at Capital Economics, a consultancy.

While many analysts believe more stimulus measures are needed to cushion the economy as external uncertainties cloud the outlook, a senior People's Bank of China official said on Thursday a relatively slower rate of monetary expansion would be enough to sustain economic activity.

The official PMI survey typically polls a large proportion of big businesses and state-owned enterprises. A separate survey, the Caixin indicator, features a bigger mix of small- and medium-sized firms.

The Caixin manufacturing PMI is due on June 3.

—CNBC's Yen Nee Lee and Reuters contributed to this report.