By Kevin Yao
BEIJING (Reuters) – China’s factories suffered their fastest drop in activity in a year in April as new orders shrank, a private business survey showed on Monday, hardening the case for fresh stimulus measures to halt a slowdown in the world’s second-largest economy.
The latest indication of deepening factory woes raises the risk that second-quarter economic growth may dip below 7 percent for the first time since the depths of the global crisis, adding to official fears of job losses and local-level debt defaults.
The HSBC/Markit Purchasing Managers’ Index (PMI) fell to 48.9 in April – the lowest level since April 2014 – from 49.6 in March, as demand faltered and deflationary pressures persisted.
The number was weaker than a preliminary reading of 49.2, and below the 50-point level that separates growth from contraction compared with the previous month.
“China’s manufacturing sector had a weak start to Q2, with total new business declining at the quickest rate in a year while production stagnated,” said Annabel Fiddes, an economist at Markit.
“The PMI data indicate that more stimulus measures may be required to ensure the economy doesn’t slow from the 7 percent annual growth rate seen in Q1.”
The overall new orders sub-index dipped to 48.7 in April, the sharpest contraction in a year. That suggested a marked deterioration in domestic demand, as new export orders showed tentative signs of improvement.
Both input and output prices declined for a ninth month, while manufacturers shed jobs for an 18th month, auguring poorly for an economy that grew at its weakest rate for six years in the first quarter.
An official survey released on Friday showed China’s factories struggled to grow in April as domestic and export demand remained weak. The official number of 50.1 was the weakest reading for the month of April since the data started in 2005, HSBC noted.
The private survey focuses on small and mid-sized firms, while the official one looks at larger, state-owned companies.
China will release its April economic data over the coming weeks, starting with trade on Friday.
Aside from weakness in the manufacturing sector, China is struggling with a downturn in its property market, slowing investment and high levels of domestic debt.
On Thursday, the Politburo, the ruling Communist Party’s top decision-making body, said that authorities will step up policy “adjustments” and urged further tax cuts. It also said the government must resolve financing glitches that are holding up big infrastructure projects.
Analysts believe the Politburo’s emphasis on stabilizing growth signaled top leaders’ increasing concerns about a sharper slowdown.
Economic growth is expected to slow further to 6.8 percent in the second quarter from 7 percent in the previous quarter, the State Information Center, a top government think tank, said in a research report published on Monday.
Millions of workers lost their jobs when China’s growth tumbled to 6.6 percent in early 2009. A massive stimulus package pulled the economy out of the slump, but at the cost of saddling local governments with a mountain of debt.
The think-tank, which is affiliated to the National Development and Reform Commision, the top planning agency, called for interest rate cuts of 50 basis points in the first half, coupled with reductions in banks’ reserves requirements.
The People’s Bank of China last cut benchmark interest rates by 25 bps on Feb. 28 – its second cut since November.
The central bank has also reduced banks’ reserve requirements (RRR) twice this year, by a total of 150 basis points, in a bid to boost their lending power, while home purchase rules have been eased to help the real estate market.
The think-tank also urged the government to lower the yuan currency’s real effective exchange rate by 1-2 percent this year to help boost exports.
“Underlying economic activity appears to have slowed further from March, warranting more aggressive easing measures in the coming weeks in order for the economy to stabilize toward mid-year,” Julia Wang, China economist at HSBC, said in a note.
Wang also expects a 25-bps rate cut in the second quarter.
Most economists believe China’s economic growth could cool to a quarter-century low of around 7 percent this year from 7.4 percent in 2014.
(Reporting by Kevin Yao; Editing by Simon Cameron-Moore & Kim Coghill)