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Will the Fall in New Factory Orders Trigger China Action?

Stringer | AFP | Getty Images

China's relatively benign manufacturing data triggered little reaction from Asian markets on Wednesday, but analysts said the real story was the substantial fall in new factory orders, which they believe has the potential to trigger stimulus action from the government.

China's official Purchasing Managers' Index (PMI) for April dipped to 50.6 from a March figure of 50.9, according to data from the National Bureau of Statistics, missing a Reuters forecast of 51.0. A figure above 50 indicates expansion, while sub-50 number shows contraction.

(Read More: China Factory PMI Raises Doubts About Economy's Strength)

The surprise fall didn't alarm the market watchers CNBC spoke to, but they expressed concerns over a sub-index measuring new orders, which fell from 51.7 in April to 52.3 in March, its lowest level since January.

"The headline figure was pretty much the same as March, but that is not the main story," said Alistair Chan, economist at Moody's Analytics. "The biggest surprise drop was in new export orders which showed a lot of manufacturers are experiencing a slowing in export sales."

Chan said the upshot was that China's government was now more likely to implement stimulus measures, which could lead to a bounce in China's economy late this year.

Evan Lucas, market strategist at IG Markets, said the dip in the new orders suggested that China still faces headwinds from Europe's debt crisis.

(Read More: Why China Market Bulls Aren't Surrendering)

"It is another bit of skepticism on Chinese growth. The drop in new orders... reflects the softness coming from China's biggest trading partner Europe," he said.

"This could probably increase the likelihood that China will stimulate, which could explain why the Australian dollar traded slightly up following the announcement," he said. The Australia dollar is especially sensitive to economic data from China, its biggest export market.

Eightfish | Iconica | Getty Images

Beijing has implemented a slew of stimulus measures since later 2011 to avert a hard landing, including two interest rate cuts and three reductions in lenders' reserve requirement ratios (RRR). The government also unleashed a $157 billion infrastructure stimulus package late last year to keep the economy chugging along.

There has been no major stimulus since, and experts believe any further boost from the government will come in small doses.

(Read More: Has China's Economy Hit a 'Dead End'?)

"We could see more monetary stimulus like more bank lending, the approval of more public infrastructure projects and potentially the easing of restrictions in the housing market," said Chan.

Already, in mid-April, the banking regulator relaxed rules of bank lending to local governments in a bid to boost economic growth.

"We have already seen an increase in bank lending which is a sign that the government is concerned about weak growth," said Chan, who forecast China's economy to grow 7.9 percent this year.

Analysts have been growing increasingly concerned about outlook for China's economy after its 2012 growth of 7.8 percent was the weakest level since 1999.

First quarter gross domestic product growth was also disappointing, coming in at a worse than expected 7.7 percent, down from 7.9 percent in the previous quarter. At the weekend, data showed China's industrial companies had grown by around 5 percent last weekend, markedly below a 17 percent rise in January and February, casting worries over the health of Chinese industrial sector.

A slowdown in China is a worry for investors worldwide, especially as other major economies and regions including the U.S. and Europe are showing signs of slowing. Last Friday U.S. GDP logged 2.5 percent growth, below expectations of 3 percent. The euro zone economy shrank 0.6 percent quarter on quarter in the last three months of 2012.

(Read More: Why China's Property Market Is Getting Scary)

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