Sentiment among executives at China's largest companies slipped back in May with a fall in new orders offsetting an increase in production.
The MNI China Business Sentiment Indicator fell 0.9% to 50.0 in May from 50.5 in April, leaving it exactly at the breakeven 50 level, meaning that the same proportion of companies saw an improvement in business conditions as those who saw a deterioration. Firms were more optimistic that the situation might change over the coming three months.
But while the Future Expectations Indicator increased sharply to 54.6 in May, this looks more like a rebound from April's surprisingly weak outturn of 45.3, rather than concerted vote of confidence in future business conditions.
The continued weakness in confidence is particularly disappointing given that it comes against the backdrop of March's cut to the Reserve Ratio Requirement and a pledge of further fiscal stimulus at the National People's Congress.
Positive takeaways were a rise in Production on the month to 55.8 in May from 53.8 in April, and the fact that New Orders managed to hold on to most of last month's rise, coming in at 54.6 compared with 55.8 in April. Firms were also more optimistic about the coming three months, with expectations for both orders and output rising to the highest since October 2015.
The Production Indicator has increased for three consecutive months, even as overall confidence flat-lined over the same period. In April, the surprise increase in output prompted companies to revise up their assessment of the number of employees they required to the highest since 2011, a view which was tempered in May with the Employment Indicator down 8.9% to 51.9. Similarly, more companies reported that they reduced capacity over the month.
Easier credit conditions continued to be felt by panellists in a sign that policy measures are being felt to some extent. The Availability of Credit Indicator rose 5% to 52.4 in May from 49.9 in April, while Interest Rates Paid rose to 43.8 from 36.6, although remained well below the 50 breakeven level with not a single company on the panel reporting that the interest rates they paid increased over the month.
"A year and a half since the authorities embarked on the current programme of monetary stimulus, the MNI China Business Sentiment Indicator is still languishing at a low level. Measures of credit availability in the survey show that looser policy is flowing through to companies on our panel, although it's having only a limited impact on the real economy metrics of output and orders,” said Philip Uglow, Chief Economist of MNI Indicators.