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China HSBC PMI Shows Sixth Month of Contraction


China’s manufacturing sector shrank for the sixth month running in April, according to a survey on Wednesday that showed a continued divergence between China’s larger, predominantly state-owned enterprises and smaller, private firms.

The HSBC China Purchasing Managers’ Index, geared to smaller firms, improved to 49.3 in April from 48.3 in March, but remained below the threshold of 50 that divides expansion from contraction. Still, it showed that the rate of deterioration had slowed following a difficult first quarter when economic growth hit its slowest pace in nearly three years.

By contrast, the government’s official manufacturing PMI, largely indicative of bigger firms, rose to a 13-month high of 53.3 in April, figures on Tuesday showed, thanks to stronger output. The March reading was 53.1.

“Anecdotal evidence provided by survey respondents suggested that reduced production reflected lower levels of incoming new business. There were also reports of a general deterioration in market conditions,” Markit Economics, which compiled the HSBC index, wrote in its report.

The China Federation of Logistics and Purchasing, which compiles the official index, also urged caution on Tuesday.

“Influenced by the change in demand, there is the possibility of a waning in future economic growth,” one of the federation’s analysts, Zhang Liqun, said.

The federation noted that while its sub-index for large firms was at 53.7 in April, or firmly in growth territory, its smaller firms sub-index was below the growth threshold, at 49.1.

The dichotomy represents the continuing struggle for financing by smaller firms that find it more difficult than state-owned firms to get loans and other support. Chinese manufacturers must also contend with the pressures of too much capacity and lackluster demand.

“The longer the two indicators straddle either side of the 50-line, … the less useful they become as indicators at all,” wrote Alastair Thornton of IHS Global Insight in Beijing.

Both surveys agreed that new export orders rose, albeit marginally, in April, while overall new orders fell, implying that domestic demand was relatively weak.

HSBC said some respondents were cutting prices to “stimulate fragile demand.”

That backs up comments made by the chief executive of Caterpillar [CAT 102.11 -0.66 (-0.64%) ], the world’s largest maker of construction machinery. He said the company was trying to work with dealers after sales fell sharply in the first quarter.

While input costs rose, albeit moderately, factory gate prices were unchanged in April, the HSBC survey found. That inability to pass on rising raw materials or labor costs is a sign of overcapacity.

The quantity of purchases sub-index ticked above the 50 mark for the first time since October 2011, HSBC said, although it noted that subdued demand reined in buying.

Almost four-fifths of the HSBC survey respondents said export orders were unchanged.