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China's Factory Activity Loses Some Momentum -- Update

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05/01/2016 | 06:14am CEST
By Mark Magnier 

BEIJING--An official gauge of factory activity in China edged down in April, signaling a modest weakening of momentum for the world's second-largest economy despite easy-credit policies and a stronger real-estate market.

China's official manufacturing purchasing managers index, a key gauge of factory activity, fell to 50.1 in April from 50.2 in March, the National Bureau of Statistics said Sunday. This was below a median forecast of 50.4 by 12 economists polled by The Wall Street Journal. But the indicator remained above the 50 mark that signals expansion for the second straight month, after a stretch of seven months in contraction below that level. China's official nonmanufacturing PMI, also released Sunday, fell to 53.5 from 53.8 in March.

The unexpected, if modest, drop in activity suggested that government efforts to bolster growth by expanding credit are having a short-lived effect. "This really highlights the fact that the stimulus we saw in the first quarter has a limited time frame," said IG Markets analyst Angus Nicholson. "The fact that the PMI is already weakening shows the easy-credit policies are having far less efficacy in driving growth."

Credit growth rose sharply in the first quarter and Beijing frontloaded 2016 infrastructure spending in a bid to bolster momentum. The economy grew 6.7% in the first quarter, its slowest pace since 2009.

The central bank is unlikely to ease monetary policy in response to Sunday's weaker data, economists said, given that factory output continues to expand while debt levels are still rising. Corporate debt, now an estimated 160% of gross domestic product, has grown rapidly over the past half-decade partly due to increased borrowing to ward off the financial crisis.

"Beijing is unlikely to ratchet up its stimulus measures, but neither will it tighten its easing policies given the lower-than-expected PMI figures," said HSBC economist Ma Xiaoping. "The PMI data shows the Chinese economy continues its slowing trend, though it's showed signs of stabilizing."

Zhao Qinghe, an economist at the statistics bureau, said in an online comment that manufacturing activity continued to expand in April amid increased investment, an improved property market and stepped-up infrastructure spending, although he added that risks remain.

"Factory investment still declined while overall investment was recovering, which will rein in further expansion of production," Mr. Zhao said.

A subindex measuring new factory orders dropped to 51.0 from 51.4 in March, while the production subindex decreased slightly to 52.2 from 52.3 in March, the statistics agency said.

Sunday's weaker figures could hurt commodity markets, including iron ore and copper, that have pinned their hopes on a strong Chinese recovery. "China enthusiasm has been a bit overpriced," said Commerzbank economist Zhou Hao in a note.

IG Markets' Mr. Nicholson said recent stimulus measures may produce a temporary upturn, but undercut the government's pledge to deleverage and shut production in the steel, coal and related industries producing more than the market needs.

"This shows that the focus should be less about propping up growth with easy credit and more that debt-led investment is running out of steam," he said. "What they really need is to deal with debt and overcapacity."

Grace Zhu contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

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