×

China's factory activity surprisingly shrinks in March

China's factory activity surprisingly shrank in March as new orders crumbled, a private survey showed on Tuesday, data that could usher in more stimulus measures from the government.

The HSBC flash Purchasing Managers' Index (PMI) fell to an 11-month low 49.2, from a final reading of 50.7 in February, well below the boom-bust level of 50. A Reuters forecast expected a print of 50.6.

China's Shanghai Composite widened losses to 0.3 percent on the back of the data. The Australian dollar extended losses to $0.7849 from $0.7865 against the U.S. dollar.

"It is a surprise because we had seen a bit of an improvement in February and now its a really big step back," Frederic Neumann, co-head of Asian Economics Research at HSBC, told CNBC Asia's "Squawk Box".

"It really does show that the government has not done enough yet in terms of stimulus. Yes, they have cut interest rates, they have injected liquidity; but the economy is really suffering and so this means three things: more stimulus, more stimulus and more stimulus," he added.

The new orders sub-index fell to a 11-month low of 49.3, while new export orders decreased for a second straight month. The employment sub-index contracted for a 17th straight month, hitting its lowest since the height of the global financial crisis.

Kay | E+ | Getty Images

China's economy has been hamstrung by a slowing property market, volatile exports and weak consumption. Since November, the People's Bank of China has cut interest rates twice and reduced the reserve requirement ratios (RRR) of major banks - the minimum cash lenders must hold in reserves - once, in a bid to bolster the economy.

Earlier this month, Beijing set its growth target for 2015 at "around 7 percent." The world's second-largest economy grew at 7.4 percent in 2014, the slowest pace in 24 years, and missing the official target of 7.5 percent.

"Today's PMI reading is the latest in a string of disappointing data out of China and strengthens our view that the economy likely slowed sharply in Q1," said Julian Evans-Pritchard, China economist with Capital Economics, wrote in a note.

"Looking ahead, we expect the deceleration in growth to moderate in coming months as policymakers step up fiscal spending and carry out further cuts to the RRR and benchmark interest rates in order to prevent growth this year from slipping too far below their annual target.

Neumann also expects a mixture of further rates and RRR cuts, which will come "sooner rather than later," but adds that monetary policy can only take the economy so far.

"Remember that local government, we have a bit of a funding squeeze here, and its likely that Beijing has to step in to add some extra fiscal stimulus to maintain construction activity which is really the ailing part of the Chinese economy at the moment," he said.