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Better looking PMIs belie a weak Chinese economy

China's factory activity surprisingly expanded in March, government data showed on Wednesday, but analysts are still betting on more easing measures to come, to prevent growth from slipping further.

The official Purchasing Managers' Index (PMI), the bellwether of large industrial firms, rose to 50.1 in March from February's 49.9, a touch above the 50-mark that that separates growth from contraction. A Reuters forecast had expected a figure of 49.8.

The reading was better than the March HSBC final PMI, also released Wednesday, which showed the nation's vast manufacturing sector in contraction. The 49.6 final print, however, is stronger than the preliminary figure of 49.2.

The Australian dollar snapped six sessions of declines against the dollar on the news, climbing to a high of $0.7664, from $0.7612. The Shanghai Composite traded 0.8 percent higher by mid-morning, while the Hang Seng rose 0.5 percent.

"After a string of disappointing data, the improvement in the official PMI is welcome news and suggests that the recent rate cuts and pick-up in bank lending growth may be helping to support large firms," Julian Evans-Pritchard, China economist with Capital Economics, wrote in a note.

"That said, growth is still likely to have slowed sharply last quarter and we expect more policy support measures, including further rate cuts and required reserve ratio reductions, as the government moves to avoid missing its annual growth target," he added.

Employees manufacture toys at a workshop in Lianyungang, Jiangsu province of China.
ChinaFotoPress | Getty Images
Employees manufacture toys at a workshop in Lianyungang, Jiangsu province of China.

The breakdown of the PMI sub-indexes showed a mixed picture. There was a marked pick-up in the output component, from 51.4 to 52.1, which was the biggest factor behind the improvement in the headline index.

The employment component also rose but the new orders component fell, with a similar sized fall in the export orders subcomponent suggesting that softening external demand was partly responsible.

"The pickup in the manufacturing PMI was concentrated among larger firms, likely reflecting expectations of stabilizing demand from China's construction industry," said Bill Adams, senior international economist for PNC Financial Services Group.

China's economy has been dragged down by a slowing property sector, volatile exports and weak consumption.

In another sign that businesses faced lackluster demand, a separate survey of China's services sector showed the official non-manufacturing PMI fell to 53.7 from February's 53.9, hugging a one-year low of 53.7 struck in January.

Earlier this week, the People's Bank of China moved to boost property sales, slashing the downpayment required to buy second homes and waiving the tax on some deals, a move analysts say signals more easing to come.

Since November, the central bank cut interest rates twice and lowered the reserve requirement ratios (RRR) of major banks once, as growth in the world's second largest economy slowed to 7.4 percent, its slowest pace since 1990.

Beijing has set 2015 growth target at "around 7 percent."

"The economy is facing a lot of pressure downward. The policy easing will help in the second half, but the first half will face more headwinds," said Zhang Zhiwei, chief economist & head of China equity at Deutsche Bank, who expects growth in the first two quarters to fall below 7 percent.

HSBC, the author of the private PMI survey, expects further stimulus in the coming weeks.

"Recent policy actions such as the easing of mortgage rules suggest that policy-makers' concerns over the slowdown in growth and inflation are intensifying. We expect a further 50bps cut to the policy rate and 200bps cut to the reserve ratio for the rest of 2015," Julia Wang, Greater China economist, wrote in a note.

ANZ's latest note on on policy action, while less aggressive, is tipping another quarter point cut to interest rates this year and RRR to be lowered a further 100bps.