China's April factory activity unexpectedly dips as export orders collapse: Caixin PMI

China's factory activity unexpectedly shrank in April, a private-sector survey showed on Thursday, as the coronavirus pandemic shattered global demand, causing a substantial drop in export orders and more layoffs.

The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 49.4 last month, from March's expansionary 50.1. The 50-mark separates growth from contraction on a monthly basis. Analysts had expected the PMI to rise to 50.3.

While the dip in activity was not as severe as the extreme contractions seen in other countries, the survey, which focuses mostly on small and export-oriented businesses, reinforces views that any recovery in the world's second-biggest economy is likely to be some way off.

The contraction seen in the Caixin survey was worse than China's official factory PMI released earlier on Thursday, which slipped to 50.8 from 52.0, showing activity expanded albeit at a slower pace.

A sub-index for production in the Caixin survey rose to 51.1 in April from March's 50.6, underpinned by more government easing of restrictions previously imposed to curb the spread of the coronavirus outbreak.

However, export orders contracted at the fastest pace since the 2008 global financial crisis, with a sub-index dropping to 33.7, as external demand collapsed due to heavy lockdowns worldwide. That reading was even worse than February when China's economic activity ground to a standstill.

The export slump pushed overall business lower, suggesting the recovery in domestic consumption has been limited.

"To sum up, the sharp fall in export orders seriously hindered China's economic recovery in April, although businesses were gradually getting back to work," Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, said in a note accompanying the survey.

Some analysts even raised the prospects of a recession in China as they predict second-quarter growth could stay below zero. The economy shrank 6.8% in the first quarter from a year earlier, marking the first contraction since current quarterly records began.

Weak demand has prompted manufacturers to reduce their payrolls at a faster pace in April, the survey showed, while companies slashed their selling prices for the third straight month.

Concerns over the impact of the pandemic weighed on business confidence, with an index for optimism over the next 12 months dipping to a four-month low.

"Unlike in February and March, manufacturers' confidence was not high in April as the coronavirus' hard hit on external demand forced them to reassess the pandemic's impact: the economic shock may be greater than previously thought, and it may take longer for the economy to recover," said CEBM Group's Zhong.

"A package of macroeconomic policies, as suggested in the April 17 Politburo meeting, must be implemented urgently. It is particularly necessary to aid weak links including small and mid-size enterprises and personal incomes."

China will step up macroeconomic policies to offset the impact of the coronavirus pandemic, the ruling Communist Party's politburo said in a meeting earlier this month.

Policies could include raising the ceiling on the budget deficit ratio, increased bond issuance, and a more flexible monetary policy with more reductions to reserve requirement ratios and benchmark lending rates. Market rates would be guided lower.