China economy starts second quarter badly

The Chinese HSBC flash manufacturing PMI fell to 50.5 in April from March's 51.7 and against consensus expectations of 51.5, sending a chill through markets and pushing down Chinese stocks.

Export orders saw a sharp decline, retreating into contraction territory at 48.6 in April from 50.5 in March, the lowest reading in six months.

Production fell 1.9 points to 51.1 and new orders declined by 1.6 points to 51.7, while employment continued to fall by 0.5 points.

The Hang Seng stock market index fell 1.4% immediately after the data was released, while the Shanghai Composite lost more than 2%.

Some economists have expressed hope that Chinese policymakers will have to take action if the data continues to be bad, but Qinwei Wang, China Economist at Capital Economics, believes that this will not be the case yet.

"With the labor market still looking healthy, we think policymakers will remain focused on controlling credit rather than adding stimulus," Wang said.

The bad flash PMI figure comes after weaker-than-expected growth in the first quarter, of 7.7% versus 8% forecast, which prompted many analysts to revise down their economic growth projections for China.

Louis Kuijs, an analyst with RBS, says that the weakening of global demand was "a key factor" behind the slowdown in China's economy in the first quarter. 

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People’s Bank of China Governor Zhou Xiaochuan was quoted by Bloomberg as saying that the slower growth was "normal" as the country adjusts to make structural reforms.

But Kuijs still believes the slowdown is cyclical.

"Structural changes should not show up in abrupt changes in growth—especially not in the absence of significant policy adjustments," he said.

"Moreover, inflationary pressure has diminished in the first quarter and there are signs that spare capacity has gone up. That points to a cyclical slowdown caused by demand weakness, even though no major stress has yet appeared on the labor market."

But, Wang said, although the flash PMI readings point to economic weakness, the situation is not as bad as to spur the government into offering fiscal stimulus or the central bank into monetary easing.

"We believe that growth is not far below the current sustainable rate," he said.

"There have been few reports recently of large-scale job losses, which implies there is little to be gained from stimulus. Indeed, local employment bureaus reported that the excess of job openings relative to job seekers in the first quarter was wider than ever before."

"It is also clear that the risk of fuelling bad investment through further rapid credit expansion has increased. The risks stemming from excess credit growth still outweigh those resulting from weak economic growth," Wang said.

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