China official PMI rises slightly to 50.4 in April

Seamstresses work at a clothing company in Huaibei, China.
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China's factory activity picked up slightly in April suggesting that the world's second largest economy is beginning to stabilize.

The official manufacturing purchasing managers' index (PMI), released by the National Bureau of Statistics, crept up to 50.4 last month from 50.3 in March – rising further above the 50 line that separates expanding activity from a contraction. The reading, however, was a touch below market expectations for 50.5, according to a Reuters' poll.

In reaction, the Australian dollar crept into positive territory to trade at $0.9284 while Australian shares erased early gains to slip 0.2 percent. Australian assets are particularly sensitive to the data given that China is its largest trading partner.

"The data is consistent with stabilization in the economy following the slowdown seen earlier this year," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

A preliminary PMI survey by HSBC released last week showed that factory activity ticked up in April to 48.3 from March's final reading of 48.0 - but still remained in contractionary territory for a fourth straight month. The final HSBC PMI is due on May 5.

The official PMI is weighted more towards larger and state-owned enterprises while the HSBC survey focuses more on smaller private firms.

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Ting Lu, chief China economist at Bank of America Merrill Lynch says the data points to a potential improvement in domestic demand in the second quarter due perhaps to some of the recent growth supportive measures.

The new orders sub index rebounded to 51.2 in April from 50.6 in March. However, new export orders fell to 49.1 in April from 50.1.

In early April, the Chinese government unveiled targeted measures to support the economy, including speeding up railway construction, upgraded housing for low-income households and tax relief for small businesses - providing a boost to business sentiment. In addition, the central bank cut its reserve requirement ratio (RRR) for rural banks.

The world's second largest economy grew 7.4 percent in the first quarter, slowing from 7.7 percent in the last quarter of 2013.

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Zhiwei Zhang, chief China economist at Nomura, however, does read the latest data as a stabilization in the economy.

"We do not believe the economy has passed a turning point," he said.

"We continue to expect growth to slow to 7.1 percent in the second quarter, with risks on the downside as leading indicators in the property sector fell sharply in the first quarter," he said.

Growth in property investment slowed to 16.8 percent in the first three months of the year from 19.3 percent in the first two months.

Zhang expects the government to loosen fiscal and monetary policies in the next few months. He forecasts the central bank will cut the RRR for the overall banking system by 50 basis points in May or June and another 50 basis points in the third quarter.

Decreasing the reserve requirement ratio tends to stimulate economic activity as lenders have more assets to loan out.