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China Manufacturing Gauge Rises to Highest Level in Five Months

June 2 (Bloomberg) -- China’s manufacturing expanded at the fastest pace in five months, in a sign the government’s measures to counter an economic slowdown are gaining traction.

The Purchasing Managers’ Index rose to 50.8 in May, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing, compared with the 50.7 median estimate of analysts surveyed by Bloomberg News. April’s reading was 50.4, with numbers above 50 indicating expansion.

The Communist Party has stepped up the pace of stimulus measures, including faster spending from government budgets and increased railway investment, to help meet an official growth target of about 7.5 percent this year. The cabinet said last week it would cut reserve requirements for some lenders, as authorities contend with a property-market slump.

“The so-called mini-stimulus is helping to stabilize the economy,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. At the same time, the rebound in PMI isn’t as strong compared with the same period in previous years, and the “central government needs to make a bigger move,” he said.

Liu maintained his forecast for a “high possibility” of a cut in banks’ reserve-requirement ratio in the second or third quarter.

Estimates from 30 analysts for yesterday’s figure ranged from 50.1 to 51.5.

HSBC Index

A separate manufacturing PMI from HSBC Holdings Plc and Markit Economics rose to a five-month high of 49.7 in May, based on a preliminary reading released May 22. The final number is due June 3.

The government’s PMI is based on survey responses from purchasing executives at 3,000 companies, while the HSBC-Markit report comes from more than 420 enterprises.

The State Council, or cabinet, said May 30 it will cut the reserve-requirement ratio for lenders that have extended a certain amount of loans to rural borrowers and smaller companies. The People’s Bank of China will set up a re-lending facility for smaller companies and has set this year’s quota at 50 billion yuan ($8 billion), state television reported May 31.

Most subindexes in the official PMI rose in May. Output increased to a four-month high and the measure of new orders was at the highest since November. The employment gauge fell to 48.2 from 48.3, continuing to signal contraction.

Different Sizes

China’s stimulus showed signs of helping companies other than the biggest ones, with a PMI for medium-sized enterprises rising to 51.4 from 50.3 in yesterday’s data. That compared with 50.9 for large companies, up from April’s 50.8, and a 48.8 reading for small enterprises that was unchanged from the previous month.

Growth in industrial production and retail sales from a year earlier unexpectedly decelerated in April. A cooling property market threatens to limit any rebound, with a 22 percent drop in new building construction in the first four months of the year and a May drop in home prices from April that was the first in almost two years, according to SouFun Holdings Ltd., the nation’s biggest real estate website owner.

The world’s second-largest economy is projected to grow 7.3 percent this year, which would be the weakest pace since 1990, according to an analysts’ survey in May. Expansion slowed to 7.4 percent in the first quarter from a year earlier, from 7.7 percent in the previous period.

‘Minor’ Improvement

Yesterday’s report is “slightly better than expected but the improvement is still quite minor,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. While mid-sized companies are benefiting from fiscal stimulus, the State Council’s latest action underscores the importance of reducing financing costs for companies and home buyers, he said.

The interbank market shows the central bank is easing monetary policy, Standard Chartered Plc analysts said in a May 28 report. The seven-day repurchase rate, a gauge of funding availability, dropped 0.93 percentage point last month to 3.25 percent, according to a daily fixing.

Lenovo Group Ltd., the world’s largest maker of personal computers, reported a 25 percent jump in profit for the three months ended in March. As the company with headquarters in Beijing and the U.S. continues to gain scale and market share in PCs, smartphones and tablets, that will boost profitability, Chief Executive Officer Yang Yuanqing said May 21.

‘New Normal’

The central government has intensified steps to sustain growth in recent weeks, even after Chinese President Xi Jinping said the nation needs to adapt to a “new normal” in the pace of expansion.

The Finance Ministry on May 28 called for faster spending of budgeted funds. Guangdong province, the largest regional economy, will allocate 64.7 billion yuan to support growth, according to a May 27 report on the local government’s website.

The government is likely to “step up targeted measures,” such as the reserve-ratio cut for qualified banks announced last week, while resisting calls for bigger steps including cutting benchmark interest rates and reserve ratios for all banks, Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in an e-mail.

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