By Jonathan Cheng

SHANGHAI--China's economic recovery hit a speed bump in May as the coronavirus pandemic began curbing the world's demand for Chinese goods.

More and more Chinese factories have reopened for work in the past three months as authorities have eased their once-aggressive coronavirus measures. But now they are facing the dire reality of falling orders from overseas customers.

The conundrum can be seen in official and private gauges of China's factory activity. China's official manufacturing purchasing managers index and a closely watched private survey, the Caixin China manufacturing purchasing managers index, both showed factory activity expanding in May.

For the official factory survey, the reading of 50.6 marked the third straight month of expansion, while the Caixin survey showed factory activity jumping to a four-month high of 50.7 in May, from 49.4 in April. For both indexes, the 50 mark separates expansion from contraction.

Below the surface, however, there is evidence that China's nascent economic recovery is already beginning to stall.

While China's official PMI, released by the National Bureau of Statistics on Sunday, showed continued expansion, the magnitude of the gains fell for a second straight month, and a subindex to measure production slipped to 53.2 from 53.7 in April--pointing to sluggish demand. Worryingly, the new-export-orders subindex, a gauge of external demand, continued to remain deep in contractionary territory, though it improved to 35.3 in May, from 33.5 in April.

Meanwhile, the Caixin PMI survey, which is tilted toward smaller private manufacturers, showed new export orders contracting at a historically sharp rate, Caixin Media Co. and research firm IHS Markit reported Monday.

While work resumptions and stabilized supply chains have enabled manufacturers to ramp up their output again, production remains much more robust than demand, Wang Zhe, a senior economist at Caixin Insight Group, said in a statement accompanying the Monday release.

Taken together, China's manufacturing surveys suggest that the pace of the economic recovery from the coronavirus disruption is slowing, due in large part to lackluster overseas buying, said Yang Weixiao, a Beijing-based economist at Kaiyuan Securities.

"I'm afraid the fastest pace of recovery is already behind us," Mr. Yang said. "Weak demand is indeed the biggest problem."

Mr. Yang worries that soft demand is likely to continue to hobble smaller Chinese companies' recovery efforts, which are already lagging their larger peers in resuming work.

Premier Li Keqiang said last month at China's annual legislative conclave that the country would formally abandon this year's annual growth target, pointing to uncertainty around the pandemic.

Even so, Chinese leaders haven't given up entirely on growth, which underpins two other goals for Beijing this year: the eradication of poverty and the creation of nine million jobs to ensure social stability.

The continued export weakness is likely to take a toll on both of those efforts, since exports still account for a substantial part of the Chinese growth equation. In response, policy makers have pledged a slate of stimulus measures to boost the economy, though the announced response has fallen short of efforts during previous, less severe downturns.

A lack of export growth momentum could weigh on China's jobs situation for years to come, said Mr. Yang, of Kaiyuan Securities.

If there is any silver lining in the latest economic data, it is to be found outside China's factories.

The government's official nonmanufacturing PMI, released on Sunday, climbed to a four-month high of 53.6 in May, boosted by a strong recovery in the country's construction activity.

The survey covers services such as retail, aviation and software, as well as the real estate and construction sectors.

The subindex measuring construction activity surged to 60.8 in May from 59.7 previously, while the subindex measuring business activity in the service sector edged up to 52.3 from 52.1 in April.

Liyan Qi and Grace Zhu contributed to this article.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

(END) Dow Jones Newswires

June 01, 2020 01:50 ET (05:50 GMT)

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