The HSBC survey puts more emphasis on smaller companies, which are suffering more in the economic downturn than state-owned giants. - Reuters photo

BEIJING: Chinese manufacturing contracted in May for the seventh consecutive month as exports deteriorated, British banking giant HSBC said Thursday, arguing the data showed the need for more policy easing.

HSBC's preliminary purchasing managers index (PMI), which measures factory output, fell to 48.7 in May from 49.3 in April, the banking group said in a statement.

A reading above 50 indicates expansion, while a reading below 50 suggests contraction.

HSBC, which will release full-month data on June 1, said the worsening picture for the world's second economy meant Beijing would have to do more to boost growth, on top of existing infrastructure investment and liquidity easing measures.

“This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilise growth,” said HSBC's chief economist for China, Qu Hongbin.

“As long as the easing measures filter through, China will secure a soft landing in the coming quarters.”China's economy is widely expected to slow this year as woes in key export markets such as Europe and the United States hit its overseas sales.

The government has set a target of 7.5 per cent economic growth this year.

China's economy grew 9.2 per cent last year and 10.4 per cent in 2010.

The government this month cut banks' required reserve ratio, freeing up funds they can lend to clients, after unexpectedly low figures for April, with exports up just 4.9 per cent year on year and imports virtually flat from a year earlier.

“The BMI has been in the 48-49 range for several months now, so it's clear the economy remains on the sluggish side,” said Zhu Haibin, an economist with JPMorgan Chase Bank in Hong Kong.

“But it seems that the policy is now shifting towards pro-growth, and we expect that in the second half, the economy will perform strongly,” he said.

HSBC's manufacturing figures are typically more pessimistic than China's official numbers.

The HSBC survey puts more emphasis on smaller companies, which are suffering more in the economic downturn than state-owned giants.

Small companies have a harder time than their big counterparts securing funding from the banking system, and they are also typically geared towards foreign markets, so a slowdown in exports hits them harder.

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