Growth in China's manufacturing and services industries decelerated in April, according to official surveys on Tuesday, indicating a weakening momentum for the world's second-largest economy as the second quarter began.
Signs of cooling activity after sizable gains in March highlight erratic demand and underline the challenges facing policymakers, even though solid first-quarter gross domestic product (GDP) data has reduced some of the urgency to ramp up stimulus measures.
The National Bureau of Statistics (NBS) manufacturing purchasing managers' index (PMI) dropped to 50.4 in April from 50.8 in March, above the 50-mark separating growth from contraction and just ahead of a median forecast of 50.3 in a Reuters poll.
New export orders grew at a much slower rate, while employment continued to shrink, the NBS data showed.
The services subindex under the NBS non-manufacturing survey slowed sharply to 50.3 in April, the weakest pace since January, compared with 52.4 in March.
"Indicators of business activity in the catering, capital market services and property industries were in contraction," the NBS said in a statement.
Another private Caixin factory survey, also released on Tuesday, showed manufacturing activity grew more quickly as new export orders rose.
The Caixin survey is believed to be skewed more towards smaller, export-oriented firms than the much broader official PMI.
"Both the manufacturing and services PMI indexes are near the line of 50, reflecting that the current momentum of economic expansion is mild," said Zhou Maohua, a macroeconomic researcher at China Everbright Bank.
A separate business survey by the China Beige Book consultancy said every major indicator, from revenue and profits to prices and hiring, slowed in April, while corporate borrowing declined despite falling loan rates.
"April’s results say China’s 2024 growth prospects are already losing altitude," it said in a press release.
China said it would step up support for the economy, using policy tools including banks' reserve requirement ratio (RRR) and interest rates, the Politburo, a top decision-making body of the ruling Communist Party, was quoted by state media Xinhua as saying on Tuesday.
Another long-waited meeting, known as the third plenum, will be held in July, focusing on deepening reforms and promoting the modernization of China, Xinhua reported, citing the Politburo meeting.
With the U.S. Federal Reserve (Fed) and other developed economies in no hurry to cut interest rates, China may face a longer period of tepid external demand. Adding to the challenges, Beijing continues to contend with trade barriers as the U.S. accuses China of exporting its industrial overcapacity.
Officials this year underscored the need for economic development based on innovation in advanced sectors.
However, analysts said the country's immediate problem centers around a prolonged property downturn and ballooning local government debt, which have dented household and investor confidence.
Several rounds of support measures aimed at turning around the real estate sector have failed to spur a recovery, which is a major reason why China observers remain skeptical about a near-term full-blown economic revival.
Nomura analysts said this week that new home sales and construction indicators such as cement sales continue to contract sharply in April.
IMF Asia-Pacific Director Krishna Srinivasan said on Tuesday that it would help if China scaled back industrial policies to reduce misallocation of resources and excess capacity. Instead, priority should be placed on supporting domestic demand rather than on supply-side policies, he said.
While stronger-than-expected first-quarter economic growth provided a welcome impetus for the rest of the year, weakness in March month data such as retail sales, industrial profits and property investment has investors fretting about China's ability to spark a broader, sustained revival in demand.
China has set a GDP growth target of around 5.0% for 2024, a goal analysts have described as ambitious without more stimulus.
Julian Evans-Pritchard, head of China economics at Capital Economics, said the ongoing cyclical recovery will persist in the short term, largely on the back of budgeted fiscal support.
"But there are plenty of downside risks, including the threat of foreign trade barriers, a deeper downturn in property construction and a pullback in off-budget local government spending on infrastructure."