China factory activity shrinks for fourth month, but pace of decline slows

By Kevin Yao

BEIJING (Reuters) - China's factory activity shrank for the fourth straight month in April, signalling economic weakness into the second quarter, a preliminary survey showed on Wednesday, although the pace of decline eased helped by policy steps to arrest the slowdown.

Analysts see initial signs of stabilisation in the economy due to the government's targeted measures to underpin growth, but believe more policy support may be needed as structural reforms put additional pressures on activity.

The HSBC/Markit flash Purchasing Managers Index (PMI) for April rose to 48.3 from March's final reading of 48.0, still below the 50 line separating expansion from contraction.

"It's generally in line (with expectations), reflecting that the growth momentum is stabilising," said Zhou Hao, China economist at ANZ in Shanghai, who expected economic growth to pick up slightly to 7.5 percent in the second quarter.

Annual growth in China's economy slowed to 7.4 percent in the first quarter from a year earlier, its slowest pace in 18 months, but the pace was just ahead of market expectations and seemed to soothe fears of a sharp downturn.

China's central bank will cut the amount of deposits rural banks must hold as reserves by between 0.5 and 2 percentage points, it said on Tuesday, the latest in a series of measures to help combat a slowing economy.

CICC estimated that the reserve cut could release 110 billion yuan ($17.64 billion) of bank liquidity, while Nomura put the amount at 80-90 billion yuan, which was small given the size of the economy.

Many economists still expect a cut in the reserve requirement ratio for all banks later this year, as protracted economic weakness fuels capital outflows, raising the pressure on the central bank to pump more liquidity into the economy.

The government has already unveiled steps to quicken construction of railways, affordable housing for the poor, and cut taxes for small firms to underpin growth.

Signs of a slowdown in the first quarter had been evident in a series of economic indicators, prompting the government to unveil a series of measures to promote growth, although it has ruled out major stimulus.

It has also said that its main focus will be on job creation, and that it did not matter if growth in 2014 came in a little below the official target of 7.5 percent.

NEW EXPORT ORDERS SLIP

The survey showed contractions in new orders and output moderated somewhat, though new export orders slipped back below the 50 line after a pick-up in March, suggesting that the external environment remains difficult for Chinese firms.

"Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident as both new export orders and employment contracted," said Qu Hongbin, chief economist for China at HSBC, in a statement accompanying the PMI.

He added that he expected more government support measures in coming months, which was echoed by ANZ's Zhou, who believed policy support would be targeted and measured.

Analysts believe that China's property market could threaten Beijing's plan to manage a slowdown in growth, as evidence mounts of a rapid cooling in what had been one of the few strong spots in the world's second-largest economy.

($1 = 6.2375 yuan)

(Additional reporting by China economics team; Editing by Kim Coghill and Jacqueline Wong)