China’s Recovery Falters as Manufacturing Growth Cools

China’s manufacturing is expanding at a slower pace this month on weakness in global and domestic demand, fueling concern that the world’s second-biggest economy is faltering.

The preliminary reading of 50.5 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The number was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion.

China’s stocks slumped as the data provided further evidence of an economic slowdown after weaker-than-estimated numbers for gross domestic product last week prompted banks including Goldman Sachs Group Inc. to cut full-year forecasts. In Washington, central bank Governor Zhou Xiaochuan said April 20 that a 7.7 percent first-quarter expansion was reasonable and “normal,” highlighting reduced expectations after 10 percent-plus rates during the past decade.

“This paints a picture of a continued painfully slow recovery for China’s manufacturing sector,” said Yao Wei, a Societe Generale SA economist based in Hong Kong. “The government needs to help translate the easy liquidity conditions into real growth.”

President Xi Jinping’s officials are grappling with constraints on export demand, property-market overheating, the risks associated with a surge in so-called shadow banking, and weakness in consumption because of a campaign to rein in official perks such as spending on banquets.

The Shanghai Composite Index fell 2.6 percent, the biggest decline in three weeks.

European Contraction

Euro-area services and manufacturing output contracted for a 15th month in April as the currency bloc struggled to emerge from a recession, a report showed today. In the U.S., the Commerce Department is forecast to report new home sales improved in March, a Bloomberg News survey of economists showed.

In China, first-quarter growth slipped from a 7.9 percent annual pace in the final three months of last year, with bird flu in Shanghai and Zhejiang and an earthquake in Sichuan now adding to the challenges for officials.

“This has been a very narrowly based recovery, predominantly driven by infrastructure investment, but now even infrastructure investment is also apparently slowing down,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong.

Cutting Forecasts

Goldman Sachs, Royal Bank of Scotland Plc and JPMorgan Chase & Co. last week cut estimates for 2013 expansion to 7.8 percent. That would be the same as 2012’s pace, which was the weakest in 13 years.

Today’s data show that weakness in demand, including for exports, is starting to weigh on employment in manufacturing, HSBC said in a statement. The preliminary report is based on 85 percent to 90 percent of responses to a monthly survey of purchasing executives at more than 420 companies.

“Beijing is expected to respond strongly to sustain the economic recovery by increasing efforts to boost domestic investment and consumption in the coming months,” said Qu Hongbin, chief China economist with HSBC in Hong Kong.

Investors are assessing where the nation’s growth rate may settle as the working-age population declines, labor costs and incomes rise and officials wrestle with the environmental toll from polluting factories. The answer may be determined partly by the speed of efforts to tackle state monopolies and open the economy to more market forces.

“China’s undergoing economic restructuring, which sometimes is not in lockstep with growth,” Zhou said in an interview on April 20. “We need to sacrifice short-term growth for the purposes of reforms and structural adjustments.”

— With assistance by Lifei Zheng, and Kevin Hamlin

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