Plant growth in China in April slows unexpectedly as the economy struggles to gain ground

BEIJING (Reuters) – An official survey on Tuesday revealed that Chinese factory activity rose for the second consecutive month in April, albeit at a much slower pace than expected, suggesting that the economy still had struggling to recover despite the many support measures.

The unexpected loss of momentum early in the second quarter came on the heels of optimistic data from March, which raised hope among global investors that the world's second largest economy was recovering on a stronger footing.

A survey of private companies on Tuesday also revealed a loss of speed and disconcerting expectations, with plants starting to cut jobs after hiring staff in March for the first time in years.

The weak performance of the manufacturing sector, coupled with more modest growth in the construction sector, could fuel the debate on the additional stimulus measures that China needs to generate a sustainable recovery, without risking a sharp rise in debt.

The official Purchasing Managers Index (PMI) fell to 50.1 in April from 50.5 in March, the first increase in four months, according to data from the Bureau of Statistics. .

It was just above the 50 point neutral bar, which separates the expansion from the contraction on a monthly basis. Analysts polled by Reuters had predicted that the PMI should match the 50.5 in March.

"For now, official PMIs suggest that the second quarter has started more slowly and reinforce our view that there is still a risk of degradation for the short-term business," said Julian Evans-Pritchard , chief economist of Capital Economics for China, in a study Note.

Shares in much of Asia have fallen after the data, while the Chinese yuan and the Australian dollar have weakened. The slowdown in China is weighing heavily on the exports of many of its trading partners and sales of Apple's multinational companies to the 3M conglomerate.

The official factory survey was disappointing in terms of growth, but it also did not show a marked deterioration in economic conditions. Output grew at a slower but still moderate pace, while growth in new orders slowed only slightly.

Some analysts were expecting a decline in PMIs, saying the more optimistic March figures were likely due to one-off factors, such as changes in production and purchasing patterns, preceding a reduction in tax rates on added value on April 1st.

A spokesman for the statistics bureau said earlier this month that many companies had anticipated the purchase of inputs before the tax change in order to increase their tax deductions. Indeed, a PMI sub-index for commodity stocks has declined significantly from the seven-month high in March.

The construction activity gauge has risen from 61.7 in March to 60.1, which is still solid, but may indicate that the government's infrastructure push may run out of steam, despite issuance of bonds and new bank loans at the beginning of the year, analysts said.

To counter the slowdown, Beijing has stepped up its fiscal stimulus this year by unveiling tax and tax cuts amounting to 2 trillion yuan ($ 297 billion) in order to lighten the burden of business, while allowing local governments to issue 2 150 billion yuan of special obligations to finance infrastructure projects.

Analysts have warned that it will take time for these measures to take full effect, most do not expect a convincing stabilization of the economy before the middle of the year. year.

Another official study released on Tuesday showed that growth in China's services sector also slowed down in April, although it remained in solid expansion territory.

Eyes on the trade

While new factory orders have remained slow, encouraging signs have been observed in terms of exports.

The official index of export orders continued to contract, but reached its highest level in eight months, as optimism grew as to the conclusion of a trade agreement between Beijing and Washington that could ease the pressure on Chinese exporters.

President Donald Trump said Thursday that he will soon welcome Chinese President Xi Jinping to the White House, paving the way for a possible trade deal between the world's two largest economies.

US Treasury Secretary Steve Mnuchin told The New York Times that the talks were "in the final stages," while he and the trade representative, Robert Lighthizer, were preparing to travel to Beijing for more talks this week. week.

ENCOURAGING SIGNS

Despite the disappointing results of the factories, analysts believe that the first measures to stimulate growth are beginning to make their way into the system.

The official PMI survey showed that small and medium-sized manufacturers continued to degrade less well than larger companies, many of which are controlled by the state. But the activity of small manufacturers has reached a record six months, suggesting that the efforts of policymakers to support the struggling private sector are beginning to bear fruit.

Large state-owned banks were urged to increase their small business loans by 30 percent this year, although this could increase bad debts, and the central bank lowered short-term money market interest rates.

Profits may already be running out. Chinese industrial companies announced an increase in profits in March after four months of contraction.

March's better-than-expected data led to a significant shift in market expectations for stimulus this year as analysts and investors reduce their forecasts of the timing and scale of support measures.

After the fall of the PMI indices in April, "Beijing can not afford to stop easing," said Nomura economists.

The Chinese economy grew at a brisk rate of 6.4% in the first quarter, defying any expectation of a further slowdown.

Analysts say stimulus measures will eventually put a floor under growth, but they do not predict a strong rebound, as has been the case in China in the past, noting that Beijing's support measures now have been relatively more moderate.

A recent Reuters poll found that economic growth is expected to slow to 6.2 percent this year, its lowest level in 30 years, after 6.6 percent in 2018.