China factory sector growth unexpectedly slows in April

Growth in China's manufacturing sector unexpectedly slowed in April, with the official purchasing managers' index (PMI) falling to 50.6 from March's 11-month high of 50.9 as new export orders and input prices contracted, data showed on Wednesday.

The outcome was lower than market expectations in a Reuters poll of 51.0, but figure from the National Bureau of Statistics showed the PMI has stayed above the watershed mark of 50, which separates expansion from contraction compared with a month earlier, for seven straight months.

A sub-index measuring new orders fell to 51.7 in April from 52.3 in March, while new export orders swung into contraction, falling to 48.6 from 50.9 in March.

"The dip in April PMI shows that the foundation for China's economic recovery is still not solid," Zhang Liqun, an economist at the Development Research Centre, a top government think tank in Beijing, said in an emailed statement accompanying the index.

"The fall in new orders shows a change to destocking from restocking. And the plunge in input price index reflects negative expectations from companies," Zhang added.

"All these show the possibility for China's growth to slow slightly in the future. We must work to stabilize domestic demand and make our economic recovery more sustainable," he said.

Another PMI survey sponsored by HSBC, which includes more small- and medium-sized firms in the private sector as compared with the official one, is scheduled to be published on Thursday.

Its preliminary April reading, published last week, fell to 50.5 from 51.6 in March as new export orders shrank.

The fall in the official China PMI is the latest in a gloomy string of global data, including from the United States and Europe, which has dented optimism at the start of the year that the global economy was picking up.

China's financial markets are closed for a holiday and will open on Thursday.

The Australian and New Zealand dollars held their ground in subdued trade on Wednesday with most of Asia shut for a holiday, even after the PMI data added to signs of cooling growth in the world's second biggest economy.


The reading added risks to market expectations that China's economic expansion will pick up to 8.0 percent in the April-June quarter after an unexpected slip in growth in January to March to 7.7 percent.

Government comments to heighten scrutiny of local government financing vehicles, wealth management products and the country's fledgling bond market have also undermined confidence in second-quarter forecasts.

China's politburo, the top decision-making body, said in a meeting last week that China would speed up the establishment of a regulatory system for local government debt financing while strengthening oversight on potential financial risks.

"Recent policy signals suggest policy tightening has started and will adversely affect growth," Zhiwei Zhang, a China economist at Nomura, said in a note to clients before the PMI data.

He anticipates China will grow 7.5 percent this quarter, matching the pace of Beijing's full-year target, after 2012 growth fell to 7.8 percent, its weakest since 1999.

China's new government will step up infrastructure investment to offset global headwinds, but will not repeat the big stimulus package seen during the global financial crisis as Beijing seeks to rebalance its economy away from exports and towards domestic consumption.

The central bank will hold rates steady throughout 2013, as it needs to tread a delicate balance between inflation and growth, a Reuters poll showed.

A credit boom in January through March failed to keep economic recovery on track, but raised concerns it could stoke consumer and housing inflation.

China's debt-ridden local governments used new lending to repay existing loans instead of channeling it into new investment, analysts said.

And shadow banking, a main driver of a credit surge in recent months, has provided a lifeline to property funding, fuelling unwelcome housing inflation.

New home prices jumped 3.6 percent in March from a year ago, a third straight monthly increase despite an intensified government tightening campaign during the past three years.

(Reporting by Langi Chiang and Jonathan Standing; Editing by Neil Fullick)