China factory activity stalls in May as demand weakens

BEIJING, May 31 (Reuters) - China's factory activity came in flat in May, an official survey showed on Sunday, as the manufacturing sector was under pressure from weak domestic demand and higher production costs.

The official manufacturing purchasing managers' index (PMI) dropped to 50 from 50.3 in April, straddling the 50-mark separating growth from contraction, according to a survey by the National Bureau of Statistics (NBS). Economists polled by Reuters had forecast a reading of 50.

Supply improved while demand weakened, as the sub-indexes for production and new orders came in at 51.2 and 49.9 in the manufacturing PMI survey. The sub-index for raw material stockpiles was 48.6.

The PMI survey results add to slowdown concerns, after data released earlier this month showed that growth momentum cooled in April despite a rebound in exports.

Weakness in the property market, employment and consumer spending continues to dampen growth, leaving China reliant on global demand to absorb goods produced by its manufacturing sector.

China's government has vowed to address the supply-demand mismatch and set a less ambitious GDP growth target for 2026, allowing more room for reforms.

The war in the Middle East, which started in late February and led to the effective closure of the strategic Strait of Hormuz, has sent energy prices surging, threatening to squeeze manufacturers' profits as costs soar.

A summit between Chinese and U.S. leaders in Beijing in mid-May did not result in an extension of the trade truce the two governments reached late last year, although the two sides agreed to explore areas for tariff cuts on goods worth some $30 billion from each.

For Chinese manufacturers, external factors have had an uneven impact. The petrochemical sector and other upstream industries have borne the brunt of imported producer price inflation, but stockpiling by buyers concerned about further cost hikes as well as global demand for semiconductors and other AI-related goods have bolstered advanced manufacturing.

High-tech and equipment manufacturing outperformed the overall sector in May, logging PMI readings of 52.9 and 52.1, NBS data showed. Activity in high-energy-consuming industries, meanwhile, contracted.

The non-manufacturing PMI, which includes services and construction, rose to 50.1 from 49.4 in April, NBS data showed. (Reporting by Ethan Wang, Yukun Zhang and Ryan Woo)