31 May 2012 Last updated at 23:39 ET

China's factory activity weakest this year

The PMI reading measures the level of activity in factories

Activity in China's biggest and mainly state-owned factories has hit the lowest point this year due to weak domestic demand.

China's purchasing managers index (PMI), which measures activity in factories, fell to 50.4 in May, official data showed.

It is the weakest reading this year. Analysts had forecast a reading of between 51.5 to 52.2.

Analysts said China may now stimulate the world's second-biggest economy.

"The data is so bad, and so clearly points to slowdown of growth momentum, that it will likely help convince policy makers that the economy needs more stimulus," said Dariusz Kowalczyk, of Credit Agricole CIB in Hong Kong.

The PMI reading measures the level of activity in factories and takes into account various figures including new orders, output and backlog of orders.

An index number below 50 indicates a contraction in factory activity. China's PMI reading in April was 53.3, which was a 13-month high.

Mr Kowalczyk added that there were signs that future activity may continue to be sluggish.

"What's really worrying is new orders have started to shrink and inventories have started to build up at an unusually fast pace," said Mr Kowalczyk.

Other Chinese economic data for April was weaker than analysts expected and led to forecasts of growth being downgraded.

Investors' hopes that Beijing would deliver a new stimulus package to aid economic recovery were quashed early this week when the state-run news agency, Xinhua, reported that there was no large stimulus package in the pipeline.