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 Analysts see initial signs of stabilization 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 stabilizing," 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.
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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)
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