China data shows biggest drop in factory activity in a year

China’s factories suffered their fastest drop in activity in a year in April as new orders shrank, a private business survey showed on Monday, hardening the case for fresh stimulus measures to halt a slowdown in the world’s second-largest economy.

The latest indication of deepening factory woes raises the risk that second-quarter economic growth may dip below 7 per cent for the first time since the depths of the global crisis, adding to official fears of job losses and local-level debt defaults.

The HSBC/Markit Purchasing Managers' Index (PMI) fell to 48.9 in April – the lowest level since April 2014 – from 49.6 in March, as demand faltered and deflationary pressures persisted. The number was weaker than a preliminary reading of 49.2, and below the 50-point level that separates growth from contraction compared with the previous month.

"China's manufacturing sector had a weak start to Q2, with total new business declining at the quickest rate in a year while production stagnated," said Annabel Fiddes, an economist at Markit.

“The PMI data indicate that more stimulus measures may be required to ensure the economy doesn’t slow from the 7 per cent annual growth rate seen in Q1.”

The overall new orders sub-index dipped to 48.7 in April, the sharpest contraction in a year. That suggested a marked deterioration in domestic demand, as new export orders showed tentative signs of improvement.

An official survey released on Friday showed China's factories struggled to grow in April as domestic and export demand remained weak. The official number of 50.1 was the weakest reading for the month of April since the data started in 2005, HSBC noted.

The private survey focuses on small and mid-sized firms, while the official one looks at larger, state-owned companies.

Aside from weakness in the manufacturing sector, China is struggling with a downturn in its property market, slowing investment and high levels of domestic debt.

On Thursday, the Politburo, the ruling Communist Party’s top decision-making body, said that authorities will step up policy “adjustments” and urged further tax cuts. It also said the government must resolve financing glitches that are holding up big infrastructure projects.

Analysts believe the Politburo’s emphasis on stabilising growth signalled top leaders’ increasing concerns about a sharper slowdown. – Reuters