BEIJING (Reuters) – Activity in China’s manufacturing sector unexpectedly expanded for the third straight month in May but growth remained weak as orders softened, suggesting the world’s second-largest economy is still struggling to regain traction.

The official Purchasing Managers’ Index (PMI) was unchanged from April at 50.1 last month, barely above the 50-mark that separates expansion in activity from contraction on a monthly basis.

Analysts polled by Reuters had expected it to dip to 50.0.

An employee works on an assembly line producing automobiles at a factory in Qingdao, Shandong Province, China, March 1, 2016. REUTERS/Stringer

The output sub-index rose to 52.3, compared with 52.2 in April, indicating production remains solid despite efforts by the government to curb overcapacity that is plaguing sectors such as steel and coal.

But total new orders expanded at a slower pace, while growth in export orders stalled.

And manufacturers continued to shed jobs, albeit not as rapidly as in April. The employment sub-index was 48.2, compared to 47.8 in the previous month and the slowest pace in 12 months.

Prices of raw materials continued to rise but at a slower pace (55.3) as a speculative bubble deflated. Prices for several steel products fell over 20 percent in May.

A record credit binge in the first quarter boosted investment and industrial output in March, fanning hopes that the economy was picking up, but Chinese banks sharply cut back new lending in April and the growth of M2 money supply slowed.

Weaker April economic data and hints of a shift in the government’s aggressive stimulus programme have also raised concerns over whether the March bounce is sustainable.

Global financial markets have been buzzing over whether China is shifting to a more cautious policy stance since an article in the People’s Daily in early May that warned about the dangers of relying on too much debt to stimulate the economy. But signals remain mixed.

A similar survey showed activity in China’s services sector continued to expand but at a slower pace, with the official reading at 53.1 in May versus 53.5 in April.

Beijing has been counting on a strong services sector to help offset the prolonged downdraft from manufacturing, and hopes that services will create jobs for some of the millions of factory workers who are expected to lose their jobs as the government tries to cut industrial overcapacity.

(Reporting by Elias Glenn; Editing by Kim Coghill)

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