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Chinese factory activity grew slower than expected, widely watched indicators show

Key Points
  • The Caixin/Markit factory Purchasing Managers' Index for April was 50.2 — lower than the March reading of 50.8, and missing the 51 projected by analysts in a Reuters poll.
  • Results of the private Caixin survey came after China's National Bureau of Statistics released official manufacturing PMI for April, which fell to 50.1 from 50.5 in March. Analysts polled by Reuters had expected the indicator to stay at 50.5.
An employee works on an assembly line producing Mercedes-Benz cars in Beijing, August 31, 2015.
Kim Kyung-Hoon | Reuters

China's manufacturing sector grew slower than expected in April, according to data released on Tuesday.

The Caixin/Markit factory Purchasing Managers' Index for April was 50.2 — lower than the March reading of 50.8, and missing the 51 projected by analysts in a Reuters poll.

Results of the private Caixin survey came after China's National Bureau of Statistics released official manufacturing PMI for April, which fell to 50.1 from 50.5 in March. Analysts polled by Reuters had expected the indicator to stay at 50.5.

PMI readings above 50 indicate expansion, while those below that signal contraction. The official PMI survey typically polls a large proportion of big businesses and state-owned enterprises, while the Caixin indicator has a bigger mix of small- and medium-sized firms.

The Australian dollar fell by 0.13% against the U.S. dollar in afternoon trade in Asia. Following the release of the manufacturing numbers, the Aussie dollar saw a sharp drop of about 0.2%, reversing earlier gains. The Australian dollar is often seen as an investment proxy for Chinese economic prospects. China is Australia's largest trading partner, according to the Department of Foreign Affairs and Trade in Australia.

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Tommy Xie, head of Greater China research at Singaporean bank OCBC, said the "slightly softer" official PMI data can be attributed to a build-up in inventories in the previous month. He explained that many companies increased production in March to take advantage of the value-added tax cuts that went into effect in early-April.

"Overall, above 50 is still a decent number," Xie told CNBC's "Street Signs" before the release of the Caixin/Markit data.

The PMI is a survey of businesses about the operating environment. Such data offer a first glimpse into what's happening in an economy, as they are usually among the first major economic indicators released each month.

For China, the PMI is among economic indicators that investors globally watch closely for signs of trouble amid domestic headwinds and the ongoing U.S.-China trade negotiations.

More patience needed

Earlier this month, China surprised investors and analysts when it announced that its economy — the world's second-largest — expanded by 6.4% year-on-year in the first quarter of 2019. That prompted several major banks to raise their growth forecasts for China.

Tuesday's data didn't only show a slowdown in growth for the Chinese manufacturing sector, it also pointed to a loss in momentum for the services sector — which accounts for more than half of China's economy. Beijing said the official non-manufacturing PMI dipped to 54.3 in April from 54.8 in March.

Analysts from Malaysian bank Maybank said the latest sets of data suggest that China's "growth recovery is likely to be modest." But Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, said it's premature to conclude that the Chinese economic growth is slowing based on the latest indicators.

"I think we need to be a little bit more patient," he told CNBC's "Street Signs" after the release of both official and Caixin/Markit PMIs.

He added that there's still room for Chinese government's stimulus to work through the economy, so investors should observe a few more months of economic data to get a fuller picture of China's economic health.