China factory activity shrinks for fourth month in a row

China’s factory activity shrank for the fourth straight month in April, signalling economic weakness into the second quarter, a preliminary survey showed on Wednesday, although the pace of decline eased helped by policy steps to arrest the slowdown.

Analysts see initial signs of stabilisation in the 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 48.0, but was still below the 50 line separating expansion from contraction.

“It’s generally in line (with expectations), reflecting that growth momentum is stabilising,” said Zhou Hao, China economist at ANZ in Shanghai.

Annual growth slowed to 7.4 per cent 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.

"We do not believe that this uptick in the HSBC PMI signals any sort of turning point for the economy and continue to believe that growth momentum is on a downtrend," Nomura analysts said in a client note.

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 percent.

The country’s top economic planning body reiterated the message on Wednesday, saying that the economy will be fine without any heavy stimulus.

“We are confident that we have all means and are capable of keeping economic growth stable and healthy in the relatively long term, Li Pumin, spokesman of the National Development and Reform Commission (NDRC), told a media briefing.

“We will not take short term strong stimulus in response to momentary economic fluctuations.”

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.

Reuters