A government crackdown on property speculation is cooling the economy by damping sales and construction, while Europe’s sovereign-debt crisis could exacerbate a slowdown by cutting demand for exports. China’s policy makers may delay raising benchmark interest rates or letting the yuan appreciate against the dollar even after the economy grew 11.9 percent in the first quarter.

The “chances of further policy tightening are fading as a result of events in Europe and a still unfolding correction in the property market,” Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland, said before today’s data. He forecasts rates to stay unchanged this year and the yuan’s peg to the dollar to remain until at least the end of the third quarter.

Premier Wen Jiabao said yesterday in Tokyo that the world needs to guard against the possibility of a second economic slump. China will continue its proactive fiscal policy to consolidate its recovery, Finance Minister Xie Xuren said May 28.

Global Growth Peaks

Comparable indicators in manufacturing around the world in May are forecast to indicate global output growth has peaked. Australia manufacturing growth slowed in May and economists say reports due today in the U.S. will show manufacturing cooled while activity in Europe was unchanged.

The central bank has kept the key one-year lending rate at 5.31 percent and the deposit rate at 2.25 percent since December 2008 after cuts to counter the financial crisis. The yuan is trading at about 6.83 per dollar under a policy in place since July 2008 to aid exporters.

The Shanghai Composite Index fell 9.7 percent in May, the biggest monthly decline since August, on concern the European debt crisis is worsening and the government will step up property measures. The benchmark has declined more than 20 percent this year. In contrast with investors’ pessimism, Capital Economics Ltd. said this week that the Chinese economy is “gliding to a soft landing.”

Slow Growth

“The economy may continue to maintain relatively fast growth, but the growth rate may slow,” Zhang Liqun, a researcher at the State Council’s Development and Research Center, said in the statement from the logistics federation. “The May PMI may be an indication that the economic rebound is stabilizing.”

An output index fell to 58.2 from 59.1 in April, today’s report showed. The new-order index slid to 54.8 from 59.3 and an export-order index dropped to 53.8 from 54.5. The input-price index decreased to 58.9 from 72.6.

While year-on-year economic indicators for May are likely to show slower growth, “all this is telling us is that it is now a year since China’s stimulus started to be felt,” said Mark Williams, a London-based economist for the firm. Economic momentum “remains strong.”

Williams also said that the official PMI normally falls in May, “a sign that the seasonal adjustment applied is not particularly effective.” Nomura Holdings Inc. and Bank of America-Merrill Lynch expressed similar views ahead of today’s data.

Manufacturing Index

The manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

Chinese policy makers are trimming stimulus this year after the $1.4 trillion lending binge that revived growth in 2009. Officials are targeting a 22 reduction in new loans and have sold bills and raised banks’ reserve requirements to suck money out of the financial system.

Restraining inflation expectations and keeping housing affordable are two of the government’s key goals after urban property prices jumped a record 12.8 percent in April from a year earlier. Wuhan Iron & Steel Group, the nation’s third- biggest steelmaker, said May 26 that demand for steel is declining, partly because of curbs on property loans.

--Sophie Leung, Li Yanping. Editors: Paul Panckhurst, Lily Nonomiya

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net Yanping Li in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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