Factory activity contracts in April on weak demand

China's factory activity unexpectedly contracted for the first time in four months in April, indicating that the foundation of the country's post-pandemic recovery is not yet solid and underscoring the need for greater policy support to boost domestic demand, analysts said on Sunday.

Despite headwinds and challenges, they said China's economy is stabilizing and picking up steadily amid the strong rebound of in-person services, and the country will continue to witness a consumer-driven recovery in the second quarter of this year with accelerated GDP growth.

A meeting of the Political Bureau of the Communist Party of China Central Committee stressed on Friday that currently the key for the economy to steadily recover and pick up relies on the recovery and expansion of demand, saying the current economic improvement is mainly restorative with endogenous driving force still weak and demand insufficient.

The official purchasing managers index for China's manufacturing sector stood at 49.2 in April, down from 51.9 in March, data from the National Bureau of Statistics showed on Sunday, below the 50-point mark that separates growth from contraction.

This month's drop in the manufacturing PMI comes amid insufficient market demand and the high comparison base in the first quarter due to a rapid recovery in the manufacturing sector, said Zhao Qinghe, a senior NBS statistician, adding that the sub-indexes for production and new orders came in at 50.2 and 48.8 in April, both down from the previous month.

NBS data showed the reading for manufacturers' expectations for future output and business operations came in at 54.7 in April, expressing confidence in a post-pandemic recovery.

Zhou Maohua, an analyst at China Everbright Bank, said the manufacturing sector remains under pressure due to slack demand at both home and abroad, and the sector may continue to face challenges from a cloudy global outlook.

He cautioned that some manufacturing enterprises still face pressures and challenges from insufficient demand, high input costs and financing difficulties, saying that more efforts should be made to further boost consumption, expand domestic demand as well as take targeted measures to ease pressures and increase support for enterprises.

Despite facing pressures, analysts said China's economy is on track for a steady recovery amid the rebound of in-person services and consumption. NBS data showed that non-manufacturing activity expanded for the fourth straight month in April. China's non-manufacturing PMI came in at 56.4 in April, with services PMI and construction PMI standing at 55.1 and 63.9 respectively.

The country's official composite PMI, which includes both manufacturing and non-manufacturing activities, came in at 54.4 compared with 57 in March, according to the NBS.

Looking to the second quarter of this year, Zhou said China's non-manufacturing sector will continue to rebound and perform better than the manufacturing sector, mainly fueled by the strong recovery of pent-up demand in fields like mobility, catering and tourism, the implementation of key infrastructure projects and the steady recovery of the property sector.

Meanwhile, Zhou said the manufacturing sector will gradually stabilize and rebound in the second quarter, given the steady recovery of consumption and real estate, strong policy support and strong optimism among manufacturers.

Due largely to China's higher-than-expected GDP growth in the first quarter, ongoing strength in domestic services consumption and its upside surprises in exports, Nomura recently raised its 2023 annual GDP growth forecast for China to 5.9 percent year-on-year from 5.3 percent year-on-year, well above the country's preset annual GDP growth target of around 5 percent.

Lu Ting, chief China economist at Nomura, said his team forecast China's year-on-year GDP growth to rise further to 8.4 percent in the second quarter on a low base last year after 4.5 percent growth in the first quarter.

"Going forward, we expect growth in the in-person services sector to remain robust on pent-up demand and a low comparison base," Lu said, adding that the May Day holiday is the first multi-day holiday since January, which is likely to provide a boost to the in-person services sector.

As of noon on Saturday, the start of the five-day May Day holiday, bookings for scenic spot tickets have doubled compared to the same period in 2019, data from on-demand services platform Meituan showed. The number of passenger trips handled by the country's railways reached 19.66 million on Saturday, marking a record-high in terms of single-day passenger traffic, according to China State Railway Group.

Given China's robust recovery in consumption, the steady recovery of investment and the property sector gradually stabilizing, Ye Yindan, a researcher at the Bank of China Research Institute, estimated that China's economy will likely expand around 7.6 percent in the second quarter, with full-year GDP growth of around 6 percent in 2023.