Lift in China's manufacturing points to pick up

China's manufacturing expanded for a fifth month in April, reducing pressure on policymakers to open the taps on credit in the world's second-largest economy.

The Purchasing Managers' Index rose to 53.3 from 53.1 in March, China's statistics bureau and logistics federation said.

That's the highest reading in a year and compares with the 53.6 median forecast in a Bloomberg News survey of 27 economists. A figure above 50 indicates expansion.

Yesterday's data signals China may be strengthening from the slowest pace of growth in almost three years, reached last quarter. At issue for Premier Wen Jiabao is whether to extend a two-month pause in lowering banks' required reserve ratios, as he seeks to rein in property and consumer prices without sending the economy into a hard landing.

"While things do look better, it's too early to break out the champagne," said Alistair Thornton, a Beijing-based economist with IHS Global Insight.

"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."

China's gross domestic product expanded 8.1 per cent in the first three months of 2012 from a year earlier in the fifth straight quarterly deceleration as authorities cracked down on property speculation and exports were hurt by Europe's debt crisis.

The pace will slow to 7.5 per cent to 8.5 per cent this year and next, as a euro-area recession curbs exports, Moody's Investors Service said in a report last week. The economy grew 9.2 per cent last year.

A PMI compiled by HSBC Holdings and Markit Economics showed last week that manufacturing may have contracted for a sixth month in April, according to preliminary results.

The final reading of the survey, which has a different sample and methodology, is due today.

The federation's index is based on responses from managers at more than 820 companies in 28 industries, while HSBC's covers more than 420 companies and is more weighted towards smaller businesses.

The federation's "large and medium-sized companies" sub-index was 53.7 for April while its "small companies" gauge was 49.1, the same as HSBC's preliminary reading.

A measure of output rose to 57.2 in April from 55.2 the previous month, according to yesterday's statement from the federation. A gauge of new orders increased at a slower pace while export orders gained at a faster rate.

The fundamentals of the economy remain sound with growth "within a reasonable range," the State Council said after a meeting chaired by Wen on April 13.

The Government said domestic expansion faces "downward pressures" and that leaders would "maintain an appropriate level of investment." Wen has said the Government will pre-emptively adjust and fine-tune policy in a "timely and appropriate" manner.

China has lowered banks' required-reserve ratio twice since November to boost liquidity and spur loan growth.

At the same time, authorities have refrained from cutting interest rates amid inflation concerns, and have paused since mid-February in lowering banks' reserve requirements.

Economists at Societe Generale and Mirae Asset Securities (HK) said yesterday's acceleration may have been affected by seasonality.

"The peak reading in a year usually occurs in April so the actual strength of China's manufacturing sector was probably not as resilient as indicated," said Yao Wei, a Hong Kong-based economist with Societe Generale.

Joy Yang at Mirae Asset in Hong Kong described the increase as "quite shallow."

"There's a big chance that the second quarter is going to be weaker than the first quarter," she told Bloomberg Television in Hong Kong yesterday, referring to the outlook for economic growth.

"We see that the external environment has sort of stabilised but we don't see drivers in growth yet.

"I think they will have to start easing no later than middle of the year."

- Bloomberg