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China Recovery at Risk as Factory Growth Eases

Tomohiro Ohsumi | Bloomberg | Getty Images

China's factory-sector growth eased in April as new export orders fell for the first time this year, a private survey showed on Thursday, suggesting the euro zone recession and sluggish U.S. demand may be reining in China's economic recovery.

The final HSBC Purchasing Managers' Index (PMI) dropped to 50.4 in April from March's 51.6 and was largely in line with a flash reading last week of 50.5. Fifty divides expansion from contraction on a monthly basis.

China's official PMI on Wednesday painted a similar picture, falling to 50.6 in April from an 11-month high of 50.9 in March as new export orders fell.

"The slower growth of manufacturing activity in April confirmed a fragile growth recovery of the Chinese economy as external demand deteriorated and renewed destocking pressures built up," said Qu Hongbin, chief China economist at HSBC.

(Read More: Will the Fall in New Factory Orders Trigger China Action?)

A sub-index for new export orders dipped to 48.4, the first time it has retreated below 50 this year and the lowest level since last October, reinforcing concerns about the strength of the global economy.

A string of global data, including lower-than-expected U.S. economic growth figures and record unemployment in the euro zone, has dented optimism seen at the start of the year that the world economy was picking up.

The HSBC survey also showed overall new orders rose at a slower clip last month, implying softening demand growth from domestic firms.

Reflecting the weakening orders growth and lower material costs, indexes for input and output prices fell in April to the lowest level since last September and August, respectively, the HSBC report showed.

China's economic growth unexpectedly stumbled in the first quarter, slipping to 7.7 percent versus 7.9 percent in the previous three month period, as factory output and investment slowed.

Analysts polled by Reuters after the release of first quarter GDP expected China's economic growth to accelerate to 8.0 percent in the second quarter. They forecast growth for the full-year would rise to 8.0 percent from 7.8 percent in 2012, which was the weakest pace since 1999.

(Read More: These 'Growth Stars' Could Shine as China Slows)

The pull back in both the official and HSBC PMIs are likely to heighten market concerns over risks to China's economy in the short term, although most analysts expect a steady and gentle recovery this year.

Pressure on Labor Market

The HSBC survey showed a sub-index measuring employment dropped below 50 in April for the first time in five months, although it said job losses were marginal, partially caused by resignation and retirement.

(Read More: Here Is What Hurt China's Factory Profits)

Employment is a decisive factor shaping government thinking because it is crucial for social stability.

At the depth of the global financial crisis in 2008/2009, an estimated 20 million rural migrant workers lost their jobs, prompting Beijing to unveil a 4 trillion yuan stimulus package to shore up the economy and provide employment.

Still, Qu at HSBC said softer demand conditions might weigh on the labor market and could lead to fresh measures from Beijing to support the economy.

"The looming deflationary pressures also suggest softer overall demand conditions. All this is likely to weigh on the labour market, which is likely to invite more policy responses in the coming months," HSBC's Qu said.

(Read More: China's Credit Bubble: Where Did All the Money Go?)

The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing room to deliver reforms to the economy, reducing a reliance on exports for growth more towards consumption.

However, most economists believe China's labour market is holding up relatively well and Beijing may refrain from a looser monetary stance or stimulus to underpin the economy, as it may tolerate slower growth to make long-delayed reforms.

A meeting of China's politburo last week pledged to keep macro policies stable and consistent while emphasising the need to improve the quality and profitability of the economy.

"The endorsement by the politburo is critically important, as it supports Premier Li's government in resisting pressure and avoiding further stimulating the economy," Zhang Zhiwei, chief China economist at Nomura Securities in Hong Kong, said in a note to clients before the PMI data.

Contact World Economy

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