SHANGHAI (Dow Jones)--China shares ended lower Thursday after a weak preliminary reading on the nation's manufacturing activity underscored persistent weakness in the economy.
The benchmark Shanghai Composite Index fell for the second straight day, finishing down 0.5% at 2350.97. The Shenzhen Composite Index closed down 0.9% at 945.95.
HSBC said Thursday the preliminary HSBC China Manufacturing Purchasing Managers Index fell to 48.7 in May compared with a final reading of 49.3 in April. A reading below 50 indicates a contraction in manufacturing activity from the previous month, while anything above that indicates growth.
The data came as further proof that China's economic recovery hasn't picked up pace even into the second quarter.
"Investors are expecting economic stimulus from the government but the economy as it stands now is only going to deteriorate further," said Qian Qimin, an analyst with Shenyin Wanguo Securities. "This trend could continue well into June."
Government officials are clearly taking notice, especially after lackluster economic data from April. On Wednesday, China's cabinet repeated Premier Wen Jiabao's message over the weekend that the government should give bigger priority to economic growth, while stressing the need for stimulus policies including tax reforms and speeding.
Meanwhile, developments in Europe are lending little support to the domestic market. At a European Union summit in Brussels on Wednesday, leaders disagreed on how to contain the crisis with French President Francois Hollande pushing for the introduction of common European debt and German Chancellor Angela Merkel saying that such a plan could lead to fiscal laxity.
Analysts say the Shanghai Index is likely to stay rangebound until more clarity emerges on the domestic economy and the effectiveness of potential government easing from Beijing, as well as Greece's future in the euro zone.
"The market's bottom seems to be rising but the direction remains unclear," said Guoyuan Securities analyst Simon Wong. The Shanghai index, which dipped briefly below the key psychological level of 2350 today, has another support line at 2300.
Beverage makers led losses with Wuliangye Yibi down 4.7% at CNY32.59, spirits producer Lu Zhou Lao Jiao 6.6% lower at CNY40.62 and Kweichow Moutai down 4.4% at CNY220.24.
Shanghai Pharmaceuticals Holding extended losses, despite the drug maker's denial of a media report that it is being probed by regulators for financial fraud. The company, according to 21st Century Business Herald, is under investigation by the Hong Kong Stock Exchange and the Chinese securities regulator for tampering with accounting statements related to two previous acquisitions. The stock fell 0.7%, after falling by the 10% downside limit yesterday.
Railroad-related companies helped limit the losses as investors expect the government to speed up existing railway projects to encourage private capital to invest in the industry.
China Railway Erju gained 4.1% to CNY6.67 and Tianjin Good Hand Railway was up 3.2% at CNY2.62. Gem-Year Industrial, which produces products for road and railway transportation, was little changed at CNY12.44.
-By Chao Deng, Dow Jones Newswires; 86-21-6120-1200; chao.deng@dowjones.com
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