2013.05.2307:19:55UTC+00China factory activity shrinks

China's factory activity shrank for the first time in seven months in May as new orders fell, a preliminary manufacturing survey showed, entrenching fears that its economic recovery has stalled and that a sharper cooldown may be imminent.

The flash HSBC Purchasing Managers' Index (PMI) for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October and sending Asian financial markets sharply lower.

The final HSBC PMI stood at 50.4 in April.

The lack of vigor in the world's second-biggest economy implies its ability to meet the government's 7.5 percent growth target this year is increasingly difficult, analysts said, albeit it is still possible.

The soft data also sharpens Beijing's policy dilemma over whether to act to stabilize activity, or tolerate an orderly slowdown while focusing on reducing the country's dependence on exports and investment for growth, changes that would bring longer-term benefits.

Yao Wei, an economist at Societe Generale in Hong Kong, said the debate favors policy inaction from Beijing for now, as long as economic growth remains above 7 percent.

"We don't think it will trigger any cyclical policy move as long as the job market is fine," she said.

"China is really on a path of structural (growth) deceleration. It's possible (to meet the growth target) but it's becoming increasingly difficult."

The PMI survey suggested China is up against weakness both at home and abroad. A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting domestic consumption is not strong enough to offset soft global demand.

Asian stock markets extended early losses after the report, with Japan's Nikkei tumbling more than 7 percent. Oil, copper and rubber prices also retreated on concerns about softer Chinese demand, while the Australian dollar and riskier assets such as emerging Asian currencies skidded.

Thursday's PMI revived investor worries about whether China can sustain an economic revival this year, after annual growth slumped to a 13-year trough in 2012. China's factory output and investment performance for April released earlier this month had already underwhelmed markets.

The run of dismal data reports have prompted economists to slash their growth forecasts for China.

UBS this week downgraded its 2013 growth target for China to 7.7 percent, from 8 percent, and Societe Generale is in the midst of lowering its estimates. Bank of America-Merrill Lynch cut its China 2013 growth forecast earlier this month to 7.6 percent from 8 percent.

If the economy meets the government's growth target and expands 7.5 percent this year, it would still be its worst performance in 23 years.