Uh-oh, China's PMI Miss Spells Trouble Ahead

CNBC

China's first economic indicator for the second quarter far underperformed expectations on Tuesday, putting the nation's recovery in question as economists recalibrate growth projections lower for the world's second largest economy.

China's flash HSBC PMI fell to a two-month low of 50.5 in April from 51.6 in March - compared with expectations for a fall to 51.5. A reading above 50 indicates expanding activity and one below 50 signals contraction.

"It's a big miss. Confidence in the outlook for China has really diminished, particularly after first quarter growth data," said Tim Condon, head of research for Asia at ING. "People are now reforming their views on economy. The new view is that growth will be stagnant," he added.

(Read More: China's Q1 GDP Growth Slows Unexpectedly to 7.7% )

The data came a week after China stunned markets by announcing an annual growth rate of 7.7 percent in the first quarter, missing forecasts and easing from the 7.9 percent pace in the final quarter of last year.

"Weak flash PMI suggests growth may trend down in the second quarter. The (index) dropped despite positive seasonal factors which usually drive April readings of the PMI up. In the past seven years, the PMI in April has risen five times, fallen once and been flat once," said Zhiwei Zhang, chief China economist at Nomura.

Zhang believes gross domestic product (GDP) growth peaked in the first quarter and will trend lower through the rest of the year to 7.5 percent in the second quarter, 7.4 percent in the third quarter and 7.2 percent in the fourth quarter.

Asian stock markets took an immediate knock on the news, with the Shanghai Composite (Shanghai Stock Exchange: .SSEC-SZ) leading the declines, down 2.2 percent in the late morning session. The Australian dollar (Exchange:AUD=) also came under some selling pressure, falling 0.4 percent against the U.S. dollar.

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The sharper-than-expected decline in the bank's PMI index was led by falls in the new export orders, employment, input and output price sub-indexes.

"New export orders contracted after a temporary rebound in March, suggesting external demand for China's exporters remains weak. Weaker overall demand has also started to weigh on employment in the manufacturing sector," Hongbin Qu, chief China economist and co-head of Asian Economic Research, wrote in a note.

With Europe remaining in a weak patch and the U.S. economy staging a mild recovery, China is unlikely to receive a boost from its major trading partners in the coming months, said economists.

"Demand from the rest of the world will be supportive of 7.5 growth, not 8 percent growth," said ING's Condon.

(Read More: Has China's Economy Hit a 'Dead End'? )

Economists also noted that softness in the manufacturing sector is a sign of continued overcapacity, citing the country's decline in producer prices.

The producer price index - a measure of inflation at the wholesale level - fell 1.9 percent in March from a year earlier.



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