Key manufacturing index rises, but clouds still hover over economy

A key manufacturing gauge rose to a 13-month high in April but clouds still hover over the economy as smaller businesses struggle due to weak demand.

The Purchasing Managers' Index (PMI), an indicator of manufacturing activity, climbed to 53.3 last month from 53.1 in March, the highest since March 2011, according to a statement by the China Federation of Logistics and Purchasing on Tuesday.

A reading above 50 indicates expansion, below indicates contraction.

The index, based on responses from managers at more than 820 companies in 28 industries, shows economic expansion for a fifth month in the world's second-largest economy and suggests that the economy is growing at a robust rate.

"The PMI shows that China's economic growth is upbeat," said Cai Jin, vice-chairman of the federation.

Cai expected economic growth in the second quarter to hit 8.2 or 8.3 percent from 8.1 percent in the first three months, and the third quarter will see similar growth.

"But there may be more uncertainty in the fourth quarter depending on the global economic situation," he said.

"The PMI, as a preliminary indicator, showed that economic growth is warming up," said Li Daxiao, an analyst with research company Yingda Securities, in an online comment. "And recovery in the real economy will provide support and confidence to the stock market."

Markets in the Chinese mainland and Hong Kong were closed on Monday for a public holiday but shares in the Australian market extended 0.5 percent on the release of the PMI figure.

However, investors in other markets were less moved by the news because of concerns over the sluggish US economy and the eurozone debt crisis.

Tight credit, especially for developers, had helped push the economy to its weakest footing since the fall of 2008. But there are signs that loan availability is improving.

New loans in April may have reached 900 billion yuan ($140 billion), according to a recent report by China International Capital Corp. More attractive interest rates led to an acceleration in new mortgages, the report said.

"Policymakers continue to grapple with the challenge of loosening enough to prevent a sharp slowdown, but not loosening too much and sparking an inflationary spiral," Alastair Thornton, analyst at IHS Global Insight, said.

China's annual GDP growth slowed to 8.1 percent in the first quarter of 2012 from 8.9 percent in the previous three months — the fifth consecutive quarter slowdown.

Zhang Liqun, a senior economist at the Development Research Center of the State Council, said uncertainty remains even though the economy has displayed signs of moderation, citing decreasing new orders in sub-indexes.

The output sub-index rose to 57.2 in April from 55.2 the previous month, the highest since Jan 2011, while export orders also picked up slightly, according to the data.

But the sub-index for new orders, 54.5, was increasing at a slower pace, the data showed, which Zhang viewed as a reflection of weak export demand.

"Economic growth may slow further as affected by the changes in demand, and the key to steady economic growth lies in the stabilization of investment and demand growth," he said.

Meanwhile, the overall increase in April's PMI was mainly driven by "large and medium-sized companies", while the gauge for "small companies" plunged to below 50, for the first time in four months, to 49.1.

A separate PMI last week compiled by HSBC and Markit Economics, which is weighted more toward smaller businesses, showed that manufacturing may have contracted for a sixth month in April.

The preliminary results of the HSBC survey in April stood at 49.1, compared to 48.3 in March. The final reading of the survey, which covers more than 420 companies, is scheduled to be released on Wednesday.

Zhang Qizi, a researcher with the Institute of Industrial Economics at the Chinese Academy of Social Sciences, said the official PMI showed optimism on the macroeconomic level, but this was not reflected at the grassroots.

"Manufacturing activity is mainly measured by investment and the return rate of a company, both of which allow no optimism," Zhang said.

Zhang's comments were echoed by Wang Ming, a sales manager with Zhongshan Beiaos Metal Products, a producer of car alarm systems in Guangdong province, who said economic woes in Europe hurt sales last month.

"Orders from Europe, our biggest export market, didn't pick up last month and we don't see it picking up soon," Wang said. "Inventory is high and we are not in a very good position right now."

For Zhu Jianfeng, general manager of Wenzhou Gold Emperor Shoes, export orders and inventories stayed relatively stable last month, but rising material and labor costs are cutting profit.

"Pressure is on the cost side and has been there for a long time. We have to digest cost hikes by ourselves in most cases," Zhu said.

"The economic outlook is not promising when small businesses are facing heavy pressure," Zhang said.