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China official PMI hits five-month high in May, boding well for second quarter

A labourer paints antirust oil on vehicle at a factory in Wuhan, capital of central China's Hubei province January 26, 2007. China's economy grew 10.7 percent in 2006, the fastest rate since 1995, as investment and exports powered ahead despite a raft of government curbs to keep the pace of expansion in check. CHINA OUT REUTERS/Stringer (CHINA) - RTR1LMUF

By Aileen Wang and Matthew Miller

BEIJING (Reuters) - China's factory activity expanded at the fastest pace in five months in May due to rising new orders, official data showed on Sunday, reinforcing views that the world's second-largest economy is regaining momentum in the second quarter following Beijing's targeted measures to bolster growth.

The official Purchasing Managers' Index rose to 50.8 in May from April's 50.4, the National Bureau of Statistics said on Sunday, beating market expectations of 50.6.

"The PMI reading continued to improve in May, indicating that a trend of economic stabilization is becoming more evident," Zhang Liqun, a researcher at the Development Research Centre said in the statement accompanying the data.

As one of the first leading indicators gauging economic momentum, the improved reading could bode well for other May data, bolstering market expectations that the economy is regaining some strength as the government's pro-growth measures started to kick in.

The official survey showed a broad-based recovery in manufacturing activity in May, with nine out of the 13 sub-indicies pointing to improvement from the previous month.

A sub-index for new orders, a measure of foreign and domestic demand edged up to 52.3 in May from 51.2 in April, marking the highest level since last November.

The PMI data also showed export orders inched higher to 49.3 in May from 49.1 in April, though the indicator remained below the 50-level threshold that separates growth from contraction.


Beijing stepped up policy fine-tuning in recent weeks and has unveiled a slew of targeted measures this year to help shore up the economy, which has dipped to a 18-month low in the first quarter and is seen on track to post the weakest annual showing in 24 years.

"It is clear that the government has become more concerned about the continued economic slowdown and wants to further increase the strength of policy support," said Wang Tao, economist at UBS in a note to clients.

China's cabinet announced fresh easing measures on Friday to help lower funding costs and reduce operating burdens for companies to give more support for the real economy.

The measures included lowering the reserve requirement for more banks, increasing the scale of re-lending and bond financing to support smaller firms, and a further reduction of administrative fees for businesses.

China's finance ministry had also urged their local branches to quicken the pace of budget allocation to guarantee the completion of key projects and lift the slowing economy.

Those policy moves, together with the earlier steps, such as hastening construction of railways and public housing, tax cuts for smaller enterprises, have combined to give a boost to the economy, though officials and economists warned that the downside pressure still exists.

Chinese leaders have ruled out the possibility of any big fiscal stimulus to spur economic growth as they tolerate a slower growth rate while pushing ahead with structural reforms.

China has set an annual target for the economy to grow about 7.5 percent in 2014 and a Reuters poll found that economists expected growth of 7.3 percent for this year.

A preliminary HSBC/Markit PMI issued late last month showed the factory sector turning in its best performance in five months, although the reading remained below the 50-point level that suggests contraction in manufacturing activities.

All eyes now will be on the release of the final HSBC PMI at 01:45 GMT on Tuesday, which favours smaller and private companies compared with the bigger ones captured by the official PMI.

(Reporting by Aileen Wang and Matthew Miller; Editing by Matt Driskill)