Services sector contracts

Latest official PMI shows potential downside risks for China's economy

Modest growth is likely to be maintained in China, helped by ongoing structural reforms, despite it still facing some strong headwinds, particularly eurozone recession and sluggish US demand, experts said on Friday.

They were reacting to the latest official economic figures, which showed that China's non-manufacturing sector contracted in April. The figures, released by the National Bureau of Statistics, showed the purchasing managers index for the non-manufacturing, or services, sector stood at 54.5 percent in April, down 1.1 percentage points from March.

"The figure still remained above 50, which means a continuing expansion of the services sector," said Pan Jiancheng, deputy director-general at the China Economic Monitoring and Analysis Center under the NBS.

Catering, transport and maintenance firms had fewer new orders in April, which Pan blamed on subdued government spending, while new orders for hotels, telecommunications, broadcasting, television and satellite transmission services fared better.

Official figures on Wednesday had showed factory production registered slower growth in April, indicated by the 50.6 manufacturing PMI, down from 50.9 in March.

The non-manufacturing PMI is based on a survey of about 1,200 companies in 27 industries, including transportation, real estate, catering and software development.

Some global hedge fund holders, including James Chanos from Kynikos Associates, highlighted the potential downsides for China, and said he was betting on a "hard landing" when the real estate market collapses and the banks see systemic crisis.

Wang Jun, a senior economist with the China Center for International Economic Exchanges, a government think tank, said: "Slowdown risks should be taken seriously, but I am in no doubt that GDP growth will keep above 7.5 percent this year.

"It is unlikely the government will release any strong stimulus package this year, as a more important task is to improve growth quality and accelerate structural reforms."

The government stated, after a meeting on April 25, it planned to keep its macro economics policy "stable and flexible", as well as focus on the quality and profitability of growth.

It also pointed to controlling local government financing vehicles and guarding against rapid credit growth, by regulating the fund-raising activities of local governments.

Zhang Zhiwei, the chief economist in China for Nomura Securities Co Ltd, said that the government is likely to tighten regulations on "shadow banking" activities in the second quarter, which may slow the GDP growth to 7.5 percent from 7.7 percent in the first three months.

"As inflationary pressures ease, that provides policymakers with more flexibility to adjust the pace of policy tightening," Zhang said.

Qu Hongbin, chief China economist with HSBC Holding PLC, added: "Counter-cyclical spending launched earlier continues to support domestic demand as indicated by the strengthening of infrastructure investment."

"This, combined with relatively loose liquidity conditions and benign inflationary pressure, should sustain a modest growth recovery in coming quarters," he said.

"We expect the economy to continue to recover, yet there is greater uncertainty around the pace of the recovery."

Analysts said that external economic conditions will remain uncertain, with the US expecting a mid-year slowdown and as European countries continue their anemic recovery, which may weigh on China's outlook in coming months.

Lian Ping, chief economist at the Bank of Communications, suggested easing the tax burden on companies, which would help improve profits and raise confidence.

A speed-up in government expenditure would also be "an efficient measure to stabilize growth in the first half". He expected that consumer prices will remain stable in the first six months and annual inflation may cool to 2.8 percent.