Index points to softness beyond manufacturing

China's non-manufacturing business expanded at a slower pace in May, the second consecutive monthly deceleration, as exports and new orders weakened amid cooling economic growth, providing further warnings to policymakers about the need for more stimulus.

The non-manufacturing sector's purchasing managers' index fell to 55.2 from 56.1 in April and 58 in March, according to a statement released on Sunday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing.

The news followed Friday's release of the May manufacturing-sector PMI, which came in at a five-month low of 50.4.

The figures reflect sluggish expansion in the world's second-largest economy, which is expected to drag second-quarter GDP growth below 8 percent, according to economists.

The non-manufacturing PMI is based on a survey of 1,200 companies in 27 industries, including construction, air transportation and wholesaling.

A reading of more than 50 indicates expansion, while one below that means contraction.

Cai Jin, vice-chairman of the CFLP, said that the non-manufacturing sector is still growing steadily and soundly, as the index has maintained a "relatively high level" of more than 55 since the end of 2010.

The sub-index of new orders edged down to 52.5 last month from 52.7 in April, indicating that market demand remains stable and the country's economic structure is moving toward a more optimized scenario, according to Cai.

Beijing is focusing on promoting investment and domestic demand to keep GDP growing steadily and support employment. The goal is to prevent economic growth from falling into an uncontrollable stall, as the April economic data shocked the leadership after a relatively solid first quarter.

But this time, the government is being careful not to repeat anything like the 2008 4 trillion yuan ($628 billion) stimulus policy package, according to Stephen Green, an economist at Standard Chartered.

The new set of easing policies include bank lending loosing and fiscal expenditure expansion. "This will not be a rapid recovery, but we believe we are now at the turn of the China cycle," said Green.

According to official data, the sub-index that shows the price level of non-manufactured products and services slipped to 48.5 in May, compared with 50.3 in April, the only sub-index that dropped below 50.

"The decline of prices means that inflation pressure is further easing, which favors stable economic growth," the statement said.

A report from the Bank of Communications said the consumer price index in May might have fallen to 3.1 percent, compared with April's 3.4 percent, leaving more space for further stimulus.

In June, inflation may continue to fall below 3 percent as food prices are expected to decline, and the whole year's CPI may be as low as 3.3 percent, said Tang Jianwei, a senior economist with the bank.

Cai warned that rapid price declines may cut corporate profits and investors' confidence may be weakened.