China’s manufacturing activity contracted in May for the first time since October 2012, raising concerns that growth in Asia’s largest economy is slowing. A preliminary survey by HSBC Holdings plc (NYSE:HBC) (LON:HSBA) showed that new orders declined this month, and China’s flash Purchasing Manager’s Index (PMI) skidded to 49.6 in May. A reading below 50 is a sign of contraction in manufacturing activity.


China’s actual PMI in April was 50.6, which had already declined from 50.9 in March. The consistently declining factory activity indicates that it will become increasingly tough for China to reach its 7.5 percent GDP growth target this year. The world’s second largest economy grew at 7.8 percent last year, the slowest pace since 2000. Even if China achieves its 7.5 percent growth target, it will be the lowest growth rate since 1990.

Analysts Cut Their Forecasts

A number of analysts have cut their growth forecast for China. Earlier this week, UBS AG (NYSE:UBS) lowered its full year growth estimate from 8 percent to 7.7 percent. Bank of America Merrill Lynch has already lowered its forecast to 7.6 percent from 8 percent. Citi Research said in its latest report that the official PMI reading could be even lower than the flash PMI report. Citi expects the official PMI, which will be released on June 1, to come at 49.1, much lower than last month’s 50.6.

Citi analyst Shuang Ding said that weak domestic and international demand weighs on manufacturing activity. The new orders index fell to 49.5, its lowest level since September 2012. Gloomy employment sentiment is another big problem for the country.

Japanese Shares Tank

The heavy decline in the Japanese stock market was primarily triggered by poor China flash PMI data, along with Federal Reserve chairman Ben Bernanke’s comments that the central bank may scale back its stimulus program over the next few months. China is Japan’s second largest export market after the United States. A contraction in Chinese fueled concerns that demand for good and commodities in China will weaken, prompting a heavy decline in Japanese equity markets.

Nikkei 225 fell from 7.3 percent from its 5 1/2 year highs, while Topix Index skidded 6.9 percent to 1,188.34.  It’s the biggest decline in Japanese stock market since March 2011 when the tsunami and nuclear disaster wreaked havoc in the country. Both the indexes have risen about 40 percent though today this year as Bank of Japan vowed to beat deflation.