China April official factory activity expands but at slower pace

[BEIJING] Activity in China's manufacturing sector expanded for the second month in a row in April but only marginally, an official survey showed on Sunday, raising doubts about the sustainability of a recent pick-up in the world's second-largest economy.

The official Purchasing Managers' Index (PMI) rose to a less-than-expected 50.1 in April, easing from March's reading of 50.2 and barely above the 50-point mark that separates expansion in activity from contraction.

Analysts polled by Reuters had expected the number to improve to 50.4 after upbeat March data fueled hopes that the country's prolonged economic slowdown was easing.

While production expanded modestly and at nearly the same pace as in March, growth in domestic and export orders faded slightly, albeit remaining in positive territory.

In a sign of caution over the outlook, factories continued to draw down heavily on inventories of finished goods.

Factories also appeared to be stockpiling less raw materials, possibly due to recent skyrocketing price increases for commodities such as steel, which have been linked in part to a recovery in the property market.

Indeed, South Korea reported demand from China worsened in April, with exports to its biggest market tumbling 18.4 percent on-year.

And China's factories continued to shed workers, with staff cuts quickening from the previous month. The official PMI survey, which tends to focus on larger, state firms, has shown persistent declines in employment for the last 3-1/2 years.

March data had spurred hopes that China's long suffering manufacturing sector was bottoming out, with growth in industrial output and profits and fixed-asset investment all improving.

The property recovery has spurred demand for building materials from cement and glass to steel, and the recent rebound in commodity prices is bringing in more cash for some companies to service their mountains of debt.

However, sharp price increases for steel and iron ore have cooled after China's securities regulator ordered major commodity futures exchanges to control speculative trading.

Analysts also are worried that recent signs of improvement may be largely driven by companies and local governments taking on more debt, putting any longer-term recovery in jeopardy.

China's Big Five banks reported last week that their bad loans had increased by 53.2 billion yuan ($8.21 billion) in the first quarter, though non-performing loan ratios remained relatively stable.

Activity in China's services industry, meanwhile, remained strong but grew at a slightly slower pace, with the official reading at 53.5 in April, compared with the previous month's reading of 53.8.

Beijing is banking on a stronger services sector to help offset the long slump in "old economy" sectors such as heavy industry.

REUTERS