PMI reading indicates further contraction, but pace of decline slows: HSBC

Factory activity in China weakened for a fourth straight month in April, although the rate of decline eased, HSBC Holdings Plc said on Wednesday as it released its monthly Purchasing Managers' Index.

The preliminary reading was 48.3, compared with 48.0 in March. A reading below 50 indicates a contraction.

"The PMI reading in April shows growth stabilizing at a low level," the bank said.

Domestic demand improved slightly, as suggested by an increase in new orders. The sub-index reading rose to 47.7 in April from 46.5 in March. Output rebounded to 48.0 from 47.2.

Contraction in new export orders and employment will probably continue to exert downward pressure on growth, the bank said.

The average HSBC PMI during the first quarter was 48.7, compared with 51.4 a year earlier.

Separately, the Ministry of Industry and Information Technology announced on Wednesday that industrial enterprises' profitability improved in the first quarter despite slowing production growth.

"The fundamentals of the country's industrial development are good," said Zhang Feng, a ministry spokesman. "The industrial structure is being optimized, although overall production grew slowly in the first quarter," said Zhang.

Industrial profits rose 9.4 percent year-on-year in the first quarter, compared with 12.2 percent for all of 2013, he added.

Zhang said the government will continue to push for capacity reduction in the five most troubled sectors where production facilities are concerned: steel, cement, electrolytic aluminum, plate glass and shipbuilding.

According to the National Bureau of Statistics, industrial output expanded 8.7 percent year-on-year in the first quarter, a five-year low. The rate was 9.5 percent in the same period of 2013.

GDP growth slowed to 7.4 percent in the first quarter from 7.7 percent in the last three months of 2013 and 7.8 percent in the third quarter.

The State Council, the cabinet, announced steps to boost growth and employment after the release of the first-quarter GDP data.

"The measures may help growth at the margin but are probably not enough to put the economy into higher gear," said Julia Wang, an economist at HSBC.

"Current growth momentum implies a GDP growth rate of less than 7 percent in the second quarter. A slowdown on both the domestic and external fronts adds to the need for more policy support, particularly as the employment sub-index suggests increasing pressure on the labor market.

"We expect more measures to be unveiled over the course of the next few months and the central bank is expected to keep monetary policy accommodative," she added.

"China's economy is still likely to slow further this quarter, but the slowdown appears to be moderating, helped in part by the government's move to support growth with spending on railways and social housing," said Julian Evans-Pritchard, China economist at Capital Economics Ltd in Singapore.

JPMorgan Chase & Co's chief economist for China, Zhu Haibin, said: "The outlook for gradual, moderate improvement going ahead is built on the expectations of moderate improvement in external demand, as well as some pickup in infrastructure investment as the recent moderate pro-growth measures take root."

He said he doesn't expect the People's Bank of China to cut the overall reserve requirement ratio for banks in the near term as a pro-growth measure.