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China factory PMI raises doubts about economy's strength

An employee works inside a steel export factory in Taiyuan, Shanxi province, April 10, 2013. REUTERS/Jon Woo
An employee works inside a steel export factory in Taiyuan, Shanxi province, April 10, 2013. REUTERS/Jon Woo

By Langi Chiang and Jonathan Standing

BEIJING (Reuters) - Growth in China's manufacturing sector unexpectedly slowed in April as new export orders fell, raising fresh doubts about the strength of the economy after a disappointing first quarter.

The official purchasing managers' index (PMI) fell to 50.6 in April from an 11-month high in March of 50.9. Analysts had expected the April PMI to be 51.0.

The pull back on the official PMI mirrored a similar decline in a preliminary HSBC PMI last week, suggesting China's exports engine faces headwinds from the euro zone recession and sluggish growth in the United States.

China's new government has signaled it will step up infrastructure investment, which analysts said will provide support for the economy in the second quarter.

"Overall, my general feel is that China is growing but slower than people expected say a month ago," said Alvin Pontoh, economist at TDSecurities in Singapore.

"But I don't think this is reason for alarm... this is probably what the new administration is looking for. Structurally, China cannot grow at 9 or 10 percent any more, so over the next few years, you'd reasonably expect growth to edge lower to say 7 percent or so".

A string of global data, including lower than expected U.S. economic growth figures, has dented optimism seen at the start of the year that the world economy was picking up.

Market reaction to the PMI was muted as many countries in Asia and Europe are marking May 1 Labor Day holiday. China's markets are closed and will reopen on Thursday.

Benchmark three-month copper slipped and weighed on mining stocks in Australia following the PMI figures. The Australian and New Zealand dollars held their ground.

The official PMI figures showed a new orders sub-index fell to 51.7 in April from 52.3 in March, holding above 50 which separates expansion from contraction compared with a month earlier. However, the new export orders index fell to 48.6 from 50.9 in March, suggesting they were shrinking.

The input price sub index fell to 40.1 in April, its lowest in at least four years.

"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.

"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.

HSBC's preliminary PMI for April fell to 50.5 from 51.6 in March as new export orders shrank. The final reading is scheduled to be published on Thursday.

RECOVERY UNDER THREAT

The latest PMI adds risks to market expectations that China's annual economic expansion will pick up to 8.0 percent in the April-June quarter after it slipped in January to March to 7.7 percent from 7.9 percent in the previous quarter.

Zhiwei Zhang, a China economist at Nomura, said in a client note before the PMI figures that he expects growth to ease again in the second quarter to 7.5 percent.

Apart from expectations of more infrastructure investment, 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.

"We still expect major activity indicators to show a moderate growth recovery in April and 2Q. On policies, we expect overall monetary and fiscal policies to remain accommodative, though we see no need for significant stimulus," said Ting Lu, a Hong-Kong-based China economist from Bank of America Merril Lynch, in a note to clients.

Beijing is targeting 2013 growth of 7.5 percent, lower than the double digit levels of most of the past three decades as it tries to shift the economy to reduce reliance on exports and more towards consumption.

Still, the recovery from seven-straight quarters of a slowdown through the third quarter of 2012 has been uneven so far. Growth picked up in the fourth quarter but then slipped in the first quarter of this year despite a credit boom in January through March.

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

The government has promised to heighten scrutiny of local government financing vehicles, wealth management products and the country's fledgling bond market.

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

Shadow banking, a main driver of a credit surge in recent months, has provided a lifeline though 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)

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