Concern over PMI

The economic trend, as indicated by the falling manufacturing activity indices in April, is exerting pressure on the ongoing economic structural reforms and will test reform-oriented policymakers.

The final HSBC Purchasing Managers' Index for China dropped to 50.4 in April from March's 51.6, which, together with the official figure, increases concerns about the weakening of the world's second-largest economy.

Both the official data for April and HSBC calculations show across-the-board weakening. The new orders sub-index, for example, fell to 51.7 from 52.3 in March, indicating the global headwinds Chinese exports are struggling against. These will continue to be a drag on the Chinese economy for the rest of the year given the weak job creation and final PMI data for the United States and Europe.

With the adverse external environment putting pressure on China's exports, traditionally a pillar of its economy, Chinese policymakers are trapped between the task of maintaining stable growth and that of keeping the economic restructuring rolling.

Having relied excessively on exports and investment to drive high growth, China can no longer delay the urgently needed reforms. Domestic demand will be a more sustainable driver of growth, but its potential is yet to be unleashed.

In the first quarter, economic growth unexpectedly slowed to 7.7 percent year-on-year, compared with 7.9 percent in the previous quarter. Although it is still higher than the 7.5 percent target set for this year, concerns have grown and calls for stabilizing economic growth have been on the rise.

If the Chinese economy continues to slide, the slowdown will spill over into the labor market. Then policymakers may be pressured to put stabilizing growth at the top of their agenda at the sacrifice of structural reform.

The HSBC data show that the sub-index measuring employment dropped below 50 in April for the first time in five months. While massive unemployment is yet to occur, the risk has become more substantial.

To prepare for the worst-case scenario, policymakers must consider taking proper measures, such as tax cuts, to increase the disposable income of the ordinary people, so that their livelihoods can be ensured as economic growth slows. This is indispensable if the necessary structural reforms are to be pushed forward.