Chinese economic growth has been limited by struggling small-business manufacturers, based on several indexes. Manufacturing activity decreased for the first time in seven months, suggesting the Chinese economy is losing momentum more quickly than expected, the Chicago Tribune reported. The HSBC/Markit Purchasing Managers' Index (PMI) for May sunk to 49.2, down from 50.4 in April. A reading of 50 is the dividing line between expansion and contraction.
With manufacturing production shrinking, China's economic growth is also expected to slow in the second quarter. China's official index had a higher reading because the government tends to favor larger production firms, but the HSBC figures accounted for small manufacturers, MarketWatch said.
"The difficulty faced by the manufacturing sector reflects deep-rooted structural problems in the China economy," HSBC analysts wrote ahead of the report, according to MarketWatch. "Overcapacity and declining rate of return on investment are the top challenge in the manufacturing sector, and may continue to drag on China's economic growth in the medium term."
China has been experiencing less demand for exports, so some manufacturers are overstocked with inventory, Bloomberg reported. Production was much weaker at smaller enterprises than larger firms. Since the Chinese government favors bigger companies, small and mid-size manufacturers may be operating with very little policy support. If the government attempts to intervene to boost manufacturing growth, any efforts could be impeded by the rising cost of property in China.
Growth in larger companies has stagnated as well, despite government investment and support. Baoshan Iron and Steel Company, China's largest publicly traded steel-maker, was forced to lower product prices for June deliveries as demand for commodities cooled, according to Bloomberg. Many manufacturers were facing excessive inventory from increased output in the first quarter.