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Chinese manufacturing hit 5-month high in May

Growth picked up in May but is still set to be its slowest since 1990Growth picked up in May but is still set to be its slowest since 1990
Growth picked up in May but is still set to be its slowest since 1990Bloomberg via Getty Images

Activity in China’s manufacturing sector rose to its highest level this year in May, suggesting that a stealthy expansion of stimulus measures by the government may be having an effect in stopping the economic slowdown.

The National Bureau of Statistics said its purchasing managers index for manufacturing hit a level of 50.8 in May, up from 50.4 in April and its highest in five months. A reading of above 50 typically signals growth.

China’s economy has driven global growth since the 2008 financial crisis while the rich world suffered crippling recessions. But it has slowed in recent months, due in large measure to increasing problems with bad debts in its financial sector. Although analysts still expects growth of 7.3% this year (the government is targeting 7.5%), that would be the slowest rate of expansion since 1990.

However, there have been signs of an improvement recently, as the People’s Bank of China, the country’s central bank, has quietly allowed the yuan to weaken, making life easier for the exporters that are the backbone of China’s economy.

The central bank also relaxed reserve requirements for some banks on Saturday, in an effort to support lending to small businesses and rural borrowers. In addition, it said it would step up efforts to encourage banks to bundle and re-sell loans loans to small businesses in the form of bonds, a process known as ‘securitization’.

The measures are all part of a broader’ strategy to refocus growth in the domestic and private economy, rather than export-intensive, state-backed big business.

However, that strategy is being complicated by widespread suspicions of fragility in the financial system, not least due to the amount that banks have lent into a frothing real estate market over recent years. House prices have started to fall after a long boom, and Reuters quoted China’s bank regulator Friday as saying that it would tighten its oversight to prevent risks from some failed real estate developers from spreading into the broader financial system.  It maintained that overall risk from property loans was controllable, none the less.