China factory activity shrinks for 4th month in a row but at a slower pace

Wednesday 23 April 2014 08.17
HSBC/Markit flash Purchasing Managers Index for April rose to 48.3 from March's final reading of 48
HSBC/Markit flash Purchasing Managers Index for April rose to 48.3 from March's final reading of 48

China's factory activity shrank for the fourth month in a row in April, signalling economic weakness into the second quarter, a preliminary survey showed today.

However the pace of decline eased helped by policy steps to halt the slowdown.

Analysts see initial signs of stabilisation in the Chinese economy due to the government's targeted measures to underpin growth, but believe more policy support may be needed as structural reforms put additional pressure on activity.

The HSBC/Markit flash Purchasing Managers Index (PMI) for April rose to 48.3 from March's final reading of 48, but was still below the 50 line separating expansion from contraction.

Annual growth slowed to 7.4% in the first quarter from a year earlier, its slowest reading in 18 months, but the pace was just ahead of market expectations and seemed to soothe fears of a sharp downturn. 

China's central bank will cut the amount of deposits rural banks must hold as reserves by between 0.5 and 2 percentage points, it said yesterday, the latest in a series of measures to help combat the slowing economy. 

Analysts estimated that the reserve cut could release 110 billion yuan ($17.64 billion) of bank liquidity.

Other economists however expect a cut in the reserve requirement ratio for all banks later this year, as protracted economic weakness fuels capital outflows, raising the pressure on the central bank to pump more liquidity into the economy.

The government has already unveiled steps to quicken construction of railways and affordable housing for the poor, and to cut taxes for small firms to underpin growth. 

Signs of a slowdown in the first quarter had been evident in a series of economic indicators, prompting the government to unveil a series of measures to promote growth, although it has ruled out major stimulus.

It has also said that its main focus will be on job creation, and that it did not matter if growth in 2014 came in a little below the official target of 7.5%. 

The PMI survey showed contractions in new orders and output moderated somewhat, though employment decreased at a faster rate and new export orders slipped back below the 50 line after a pick-up in March, suggesting that the external environment remains difficult for Chinese firms.

"Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident as both new export orders and employment contracted," said Qu Hongbin, chief economist for China at HSBC, in a statement accompanying the PMI.

He added that he expected more government support measures in coming months.

Analysts believe that China's property market could be one threat to Beijing's plan to manage a slowdown in growth, as evidence mounts of a rapid cooling in what had been one of the few strong spots in the world's second-largest economy