China's factories scaled back production last month and slowed the pace of hiring in response to a drop in new orders from both home and abroad, an official survey showed on Tuesday.

The purchasing managers' index (PMI) compiled by the China Federation of Logistics and Purchasing (CFLP) fell to 53.9 in May from 55.7 in April.

The reading, which was close to the median forecast of 54.0 in a Reuters poll of 10 economists, marked the 15th straight month that the PMI has stood above the threshold of 50 that demarcates expansion from contraction.

The decline comes against a background of slowing money and credit growth, the gradual withdrawal of fiscal stimulus and measures to deter speculative buying in real estate.

However, Goldman Sachs economists Yu Song and Helen Qiao said the PMI has consistently fallen in May versus April since it was launched in 2005.

'After adjusting for this seasonality, the May reading was slightly higher than its April reading. Therefore, we would not view the softening in the headline PMI as a sign of much softer industrial growth in May,' they said in a note.

Zhang Liqun, a government economist, said it was difficult to judge whether the decline was due solely to these seasonal factors.

'The fall may indicate the economy is slowing from its fast pace of growth,' Zhang said in a comment issued by the logistics federation.

The PMI showed a marked slowdown in input inflation, which Zhang said would reduce cost pressures on companies.

Qu Hongbin, chief China economist at HSBC, said the slowdown signalled by the PMI, plus worries about the European debt crisis, was likely to delay an increase in interest rates to next quarter.

'This lower reading should be seen as positive as it implies that policy tightening is starting to take effect. China's overheated growth is already starting to cool down,' he said.

But Qu said money and credit growth was still excessive and would require further increases in required reserves and administrative lending curbs in coming months.

The People's Bank of China has raised the proportion of deposits that banks must hold in reserve, rather than lend out, three times this year.

But the central bank has kept benchmark interest rates unchanged despite an acceleration in year-on-year gross domestic product growth to 11.9 per cent in the first quarter from 10.7 per cent in the final three months of 2009.

'China's GDP growth should continue to cool off in the second half of 2010, which is a must to contain inflationary risk. Despite the property measures and uncertainties on exports, GDP growth is still likely to stay around 9 per cent in the second half, thanks to continued investment into ongoing infrastructure projects and steady growth in wages and consumption,' Qu said in a note. – Reuters