China May official factory PMI may mark end to 2-month expansion

BEIJING, May 27 (Reuters) - Growth in China's vast manufacturing sector likely stalled in May after slight expansions in the previous two months, a Reuters poll showed, throwing more cold water on hopes that the world's second-largest economy is reviving.

The official manufacturing Purchasing Managers' Index (PMI) is expected to fall to 50.0 from 50.1 in April, according to a median forecast of 31 economists polled.

The index will likely show that a two-month, credit-fueled expansion in March and April was short-lived and that a solid recovery in the manufacturing sector has not taken hold.

The official PMI was in contraction territory for the seven months prior to March's surprise gain.

Most economic data grew more slowly in April after a surprise rebound in March, feeding doubts that the economy is stabilising.

A record credit binge in the first quarter boosted investment and industrial output in March, but Chinese banks sharply cut back new lending in April and the growth of M2 money supply slowed.

"With concerns about rising debt, we do not believe we will see massive monetary stimulus. Our view is for a further slowdown in the economy, but not a hard landing. We think China is experiencing an ongoing soft landing", said Frederik Kunze, an economist at NORD/LB.

"There will be a transformation of the growth model in China, and this will happen at the expense of the manufacturing sector," he said.

Profit growth at China's industrial companies slowed in April, data on Friday showed. Profits rose 4.2 percent in April, sharply decelerating from an 11.1 percent gain the previous month.

Global financial markets have been buzzing over whether China is shifting to a more cautious policy stance since an article in the People's Daily early this month, but signals remain mixed.

The official newspaper quoted an "authoritative person" as saying China may suffer a financial crisis or recession if the government relies too much on debt-fuelled stimulus to boost flagging economic growth.

The Ministry of Finance said on Thursday the government could increase its own leverage ratio in order to avoid negative economic impacts of an overall contraction in debt levels, while at the same time highlighting the need to tighten checks on local government debt issuance.

The official manufacturing PMI data will be released on June 1, along with the official services PMI.

The Markit/Caixin factory PMI, a private and separate gauge of manufacturing activity, will also be released on June 1.

Economists polled by Reuters expect the Caixin PMI, which focuses on smaller companies, to show factory activity shrank for the 15th straight month in May, with the headline PMI seen easing to 49.3 from 49.4 in April. (Reporting by Elias Glenn; Editing by Kim Coghill)

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