China may accelerate policy easing as manufacturing contracts

Manufacturing activity in China

contracted for a seventh straight month in May 2012 amid weakening external demand, underscoring the need for further policy easing in the world's second largest economy.

The preliminary HSBC China Manufacturing Purchasing Managers' Index (PMI), a gauge of manufacturing activity, fell to 48.7 in May 2012 from 49.3 in April 2012, said a report by Markit Economics on Thursday.

A reading below 50 signals contraction in manufacturing activity from the previous month.

The deepening economic downturn in Europe, China's largest export market, is weighing heavily on China's exports. Companies are cutting back output as Europe's debt woes deepen.

The latest data adds to fears of a deeper than expected economic slowdown in Asia's largest economy.

The latest data has increased calls for more policy easing in China to fastrack growth amid slowing inflation and a worsening global economic outlook.

The World Bank on Wednesday revised downwards its forecast for China's economic growth in 2012 to 8.2 per cent from the 8.4 per cent growth estimated earlier

With global headwinds dampening the nation's export demand, China must ease fiscal and monetary policies to boost domestic consumption to fastrack growth.

"Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow", HSBC said.

Chinese officials, which lowered the reserve requirements for the nation's banks by 50 basis points recently, are expected to follow it up with more cuts later this year to boost credit and economic growth.

China on Wednesday pledged to do more fine-tuning of policies to boost demand and fastrack economic growth in the world's second largest economy.

Dion Global Solutions

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