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China April HSBC flash PMI ticks up, but still in contraction

China's manufacturing activity contracted for a fourth straight month in April, a private survey showed on Wednesday, but the reading showed an improvement from March.

The flash Markit/HSBC Purchasing Managers' Index (PMI) came in at 48.3, better than the final reading of 48 in March, but still below the 50-mark which demarcates expansion and contraction.

"The best thing we can say [about China's economy] is stabilization. It's not really an improvement.," said Frederic Neumann, managing director and co-head of Asian economics research at HSBC.

"Usually the PMI actually improves around April but the pickup here is been rather muted, only 0.3 points. if you look at the details, [it] doesn't seem like the economy is really pulling out of a rut," he added.

The Australian dollar, typically sensitive to China data given Australia's huge trade links with the mainland, fell against the U.S. dollar following the news, at $0.9302. The Aussie was already falling on weaker-than-expected local inflation data.

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According to Zhiwei Zhang, China economist at Nomura, who expected the figure to come in below 48, the data does not allay concerns of a slowdown in the world's second biggest economy.

'"The HSBC PMI number is actually looking more at the exporters rather than firms that serve the domestic demand. So export sector is probably picking up but to keep in mind that China's economy nowadays is much more driven by domestic rather than exports," Zhang said.

"The property sector is now the pillar for growth, not export anymore. And property indicators show real estate activity slowing down very fast and that's the reason why we're very worried about the second-quarter GDP," he added.

Tomohiro Ohsumi | Bloomberg | Getty Images

China's economy posted growth of 7.4 percent in the first quarter, slowing from 7.7 percent in the previous three months, but beating market expectations of 7.3 percent.

Most analysts are optimistic China will skirt a dramatic fall in growth even as it rebalances growth away from manufacturing, but not without consequences.

"China can avoid a hard landing but i think the trade off is that the slowdown will continue for a long time. I think china is trying to re-engineer its growth model which is a long time effort which takes multi-years," said Eddie Tam, chief investment officer at Central Asset Investments.

In the meantime, Beijing is making good its pledge to support its economy.The People's Bank of China on Tuesday said it will cut the reserve requirement ratio (RRR) – the minimum amount of deposits the lenders must hold – for rural banks, the latest in a series of support measures announced in recent weeks.

The RRR will be cut by 2 percentage points for rural commercial banks and by 0.5 percentage point for rural credit cooperatives, the People's Bank of China said in a statement on its website. After the cuts, the RRR for some rural banks will be as low as 13 percent, the central bank said.

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Analysts while the intent of the measures should be lauded, the impact will be limited and they expect more stimulus to come, particularly by the way of fiscal spending.

"I think we're going to see a little bit more focus on infrastructure projects," said Mark Konyn, CEO of Cathay Conning Asset Management, referring to the so-called mini-stimulus announced by China's State Council earlier this month to ramp up spending on railways and housing as well as offer tax breaks for small businesses.

"And I think investors are still adjusting to that fact; and the change in the market – the sector rotation that we've seen away from new economy stocks back to old economy stocks – are a reflection of that, as we expect the government come in to back-stop growth," he added.

But HSBC's Neumann believes Beijing will do more on the monetary policy front.

"Remember that the Premier has said that employment is really the red line and this has weakened again. So we think there is still room for a bit more stimulus, part fiscal but also monetary. There could a be a triple- R cut coming, not this quarter necessarily but maybe the second-half of the year," he said.

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