China’s Recovery Slows Further as Factory, Services Activity Pulls Back

The purchasing managers index remained below the 50 line that separates expansion from contraction for a second straight month, falling short of April’s 49.2 result and the 49.7 forecast by economists surveyed by The Wall Street Journal.

Meanwhile, services activity softened in May from the previous month, a worrying sign that the segment of the economy now driving the rebound may be losing momentum.

The official gauge of nonmanufacturing purchasing managers index, which covers both service and construction sectors, remained in expansion territory, but pulled back to 54.5 in May from 56.4 the previous month, China’s National Bureau of Statistics said Wednesday.

The pullback came despite a promising snapback in tourism during a five-day-long national holiday earlier in the month.

Taken together, the weaker-than-expected numbers on factory and services activity point to a tepid and short-lived post-Covid economic rebound.

That is particularly concerning given the host of structural problems, such as debt pressures and an unfavorable demographic outlook, that economists say threaten the country’s longer-term growth potential.

Despite logging relatively robust gross domestic product growth of 4.5% in the first quarter, China’s economy is still facing a host of challenges, including record youth unemployment. Property investment remains sluggish, pointing to subdued demand.

Slowing momentum in China adds to pressure on global economic growth this year, which is also being weighed down by persistent inflation and high interest rates in the developed world, as well as the knock-on effects from the war in Ukraine.

One imminent question for China is whether domestic demand will be able to increase to a degree to offset any slack in overseas orders that is expected to keep hammering factory output.

Subindexes of the manufacturing PMI

For manufacturers like Yan Zhiqiao, the idea of post-zero Covid euphoria is nonexistent. Yan, who runs a factory in the southern metropolis of Guangzhou that makes packaging for cosmetic products, said falling orders from European clients forced him to reduce his staff to fewer than 30 employees, less than half of the roughly 70 workers he employed before the pandemic.

Like other entrepreneurs in his section of Guangzhou, Yan, whose company relied on overseas clients for 70% of sales before the pandemic, said he was disappointed that orders didn’t take off this year as he had hoped.

“We thought once China opens up, it’d be much easier to do business,” said Yan. “We were wrong.”

With Chinese consumers not splurging on goods as much as he had hoped, Yan has set aside any thought of ramping up production.

“We are all trying to survive,” the 45-year-old entrepreneur said.

While the services sector has been leading the recovery this year, the subindex tracking services activity declined to 53.8 in May from 55.1 in April, China’s statistics bureau said. The construction subindex also fell to 58.2 in May from 63.9 in April.

As China’s economic data continues to weaken across the board, economists have started to slash their growth forecasts. Nomura lowered its full-year estimate to 5.5% from 5.9% previously, while Barclays this month cut its forecast to 5.3% from 5.6%, citing “faster-than-expected waning in housing demand and consumption.”

The signs of slowness have reignited the debate about whether Beijing will step in to stimulate the economy. The People’s Bank of China, the country’s central bank, has so far held off on any cuts to benchmark interest rates.

Bruce Pang, chief China economist at Jones Lang LaSalle, argued after Wednesday’s data release that a more proactive fiscal policy, coupled with monetary easing, is essential for ensuring a balanced and broad-based recovery.

“It is not clear how the government interprets the current economic condition,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, wrote on Wednesday. “The government may continue to take a ‘wait and see’ stance.”

—Grace Zhu in Beijing contributed to this article.

Write to Stella Yifan Xie at [email protected]