China's factory activity improved marginally in May, but remained in contraction zone for a second consecutive month, with analysts pointing to the need for stronger fiscal support to further boost domestic demand and cushion external shocks.
China's official manufacturing purchasing managers' index came in at 49.5 in May, up from 49 in April, according to data released by the National Bureau of Statistics on Saturday. The figure was still below the 50-point mark that separates contraction from expansion.
Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said China's official manufacturing PMI rebounded in May amid aggressive macro policy measures and a bounce in exports to the United States in the second half of the month following a thaw in trade tensions between China and the United States.
Still, challenges from both home and abroad persist.
"The current US tariffs on Chinese goods remain elevated, and the real estate sector is still in the correction phase," Wang said. "These factors limited the extent of the PMI rebound and kept the manufacturing sector in contraction last month."
Meanwhile, China's nonmanufacturing PMI, which includes subindexes for service sector activity and construction, came in at 50.3 in May, down from 50.4 in April. The country's official composite PMI, which encompasses both manufacturing and nonmanufacturing activities, rose from 50.2 in April to 50.4 in May, NBS data showed.
"Overall, the rebound in the manufacturing PMI and the rise in official composite PMI show that growth-supporting policies are playing a key role in stabilizing macroeconomic operations," Wang said.
Looking ahead, Wang said government efforts to expand domestic demand will be significantly intensified in the coming period, with a key focus on boosting consumption, accelerating infrastructure investment, and stabilizing the property market.
He said his team believes there is still ample room for maintaining a "moderately accommodative" monetary policy in the second half of the year. On the fiscal side, the country will likely roll out incremental policies to further boost consumption and expand investment in the remainder of the year.
Despite mounting external uncertainties, NBS data showed manufacturers expressing optimism and confidence, with the gauge for manufacturers' expectations for production and operation standing at 52.5 in May versus 52.1 in April.
Li Zheyu, general manager of Guangzhou Boqun Textile Technology Co Ltd, a textile fabrics manufacturer based in Guangdong province, said exports accounted for about 60 percent of the company's total business last year. "We plan to shift our focus to the domestic market this year due to volatile trade policies by the United States and increasingly fierce competition in foreign trade."
Li said the number of orders declined in May due to Washington's tariff hikes, and the company is facing inventory and cash flow pressures. He expects more supportive policy measures for export-oriented manufacturing enterprises, such as enhanced financial assistance and tax and fee reductions, to alleviate their burden.
"We are actively expanding domestic sales channels by leveraging e-commerce platforms such as Alibaba's business-to-business online trading site 1688 to navigate external uncertainties," Li said, adding that domestic consumers have shown a rising demand for foreign trade products.
"If external uncertainties intensify, we do not rule out the possibility of offsetting downward pressure on external demand through the issuance of special treasury bonds and local government special bonds," said Li Chao, chief economist at Zheshang Securities. "We expect the pace of issuance and utilization of government bonds to marginally accelerate in the third quarter."
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