Following yesterday's official (if less credible and focused mostly on SOEs) manufacturing and non-mfg PMI reports from China's National Bureau of Statistics, both of which came either in line or slightly better than expected, Caixin/Markit reported its own set of Chinese manufacturing data, and it was far more disappointing: at 49.6, not only did it miss expectations of 50.1, but by printing below 50, the operating conditions faced by Chinese goods producers deteriorated for the first time in nearly a year. As shown below, this was the first contractionary print sine last June when China's massive, anti-deflationary fiscal stimulus kicked in.

The seasonally adjusted PMI posted below the neutral 50.0 value at 49.6 in May, the first contractionary print since the middle of 2016. Although only indicative of a marginal deterioration in operating conditions, Caixin conceded that the index fell from 50.3 to signal the first decline in the health of the sector for 11 months.

The fall in the headline index coincided with slower increases in output and new orders, while staff numbers were cut at a quicker rate. Subdued demand conditions underpinned a renewed fall in purchasing activity, albeit only slight, and the first increase in inventories of finished items in 2017 so far. The latest data also signaled the first fall in input costs since last June, which in turn led manufacturers to lower their selling prices for the first time since February 2016.

Commenting on the data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:

The Caixin China General Manufacturing PMI fell 0.7 points to 49.6 in May, marking its first contraction in 11 months. The subindices of output and new business stayed in expansionary territory, but both fell to their lowest levels since June last year. The subindices of input costs and output prices dropped into contractionary territory for the first time since June 2016 and February 2016 respectively. The sub-index of stocks of purchases signaled a renewed decline, while the sub-index of stocks of finished goods rebounded, indicating that companies have stopped actively restocking as inventories began to stack up. China’s manufacturing sector has come under greater pressure in May and the economy is clearly on a downward trajectory.

And while Chinese manufacturers reported a further rise in production during May, the pace of expansion was the weakest in the current 11-month sequence and only slight. Softer growth in output reflected a relatively muted increase in total new orders during May. Furthermore, growth in new order books was also the slowest seen since the current upturn began in July 2016. Data indicated that customer demand was relatively subdued both at home and overseas, with new export sales rising at a similarly marginal pace. Confidence towards the year-ahead meanwhile remained weaker than the historical average, with the degree of optimism unchanged from April’s four-month low.

At the same time, employment continued on a downward trend, with the rate of job shedding picking up slightly for the third month running. Notably, it was the quickest decline in workforce numbers seen since last September. Lower staffing levels were partly linked to company down-sizing initiatives, but also the non-replacement of voluntary leavers. As a result, outstanding business increased again in May and at the fastest pace this year so far.

Goods producers in China lowered their purchasing activity for the first time in 11 months in May, albeit only slightly. A number of panellists mentioned that weaker than expected sales had weighed on input buying. As a result, stocks of inputs declined and at the quickest pace since January. Subdued sales also contributed to a renewed increase in inventories of finished items.

Although purchasing activity fell in May, average delivery times continued to lengthen. A number of panellists blamed longer lead times on stock shortages at vendors.

Manufacturing companies reported the first decline in average cost burdens for nearly a year in May. The rate of reduction was marginal overall, and widely linked by respondents to lower raw material prices. Firms generally passed on any savings to clients, by cutting their output charges for the first time since February 2016.

The FX market reacted swiftly with AUD/USD gains being erased...

And Offshore Yuan erasing early losses and pushing to new highs...

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None of this should come as a surprise: back in February we showed that, as a result of China's deleveraging measures, the global credit impulse had suddenly tumbled back to zero.

And since that is a 3-4 month leading indicator, it was only a matter of time before China's economy reverted back into contraction, as the latest PMI data now confirms.