China's latest batch of factory activity showed that the vast manufacturing sector has continued growing, but might have lost some steam as economic headwinds persist.

The country's official manufacturing purchasing managers index expanded for a second straight month in April but at a slower pace, data from the National Bureau of Statistics showed Tuesday. The headline reading fell to 50.4 in April from 50.8 in March, but still beat the forecast of 50.2 by a Wall Street Journal poll of economists. A reading above 50 indicates an expansion in activity while a reading below indicates contraction.

A competing private gauge that focuses more on private and export-oriented companies also signaled continued growth in manufacturing.

The Caixin Media Co. and S&P Global PMI rose to 51.4 from 51.1 in March--the highest reading since February 2023. That marked a sixth month of growth as the overall market continued to strengthen, in line with China's economic improvement in the first quarter, said Wang Zhe, senior economist at Caixin Insight Group.

The bundle of data comes as signs of recovery in the world's second-largest economy spark hope that China might be on track to hit its annual growth target of around 5%. However, weak spots punctuating a slew of high-frequency indicators keep concerns about issues like the property sector slump alive, prompting economists to call for bolder policy support to underpin the fragile recovery.

While Tuesday's readings point to a cyclical recovery that should persist short term--largely due to fiscal support--economists at Capital Economics warn China still faces plenty of risks. These include "the threat of foreign trade barriers, a deeper downturn in property construction and a pullback in off-budget local government spending on infrastructure," said Julian Evans-Pritchard, head of China economics.

A crisis in the property sector, which accounts for roughly one quarter of China's economic activity, has shown no sign of abating despite government rescue efforts. Official data showed that property investment fell 9.5% in the January-March period from a year earlier, widening from the first two months of the year.

"The real elephant in the room is still the collapsing property sector," Nomura economists said in a note to clients last week. "There has so far been little natural rebalancing in the housing market."

Purchasing demand remains soft, which is keeping property prices low and squeezing both developers and local governments that rely on land sales revenue, the Nomura economists said.

Tuesday's official data also showed that production rose in April from in March, while total new orders declined over the period and new export orders also fell, though both stayed in expansionary territory. The gauge for employment also edged down, suggesting continued lackluster appetite among manufacturers to hire more workers. The Caixin gauge showed similar caution in hiring.

"Weak expectations remain one of the major hurdles facing economic development, leading to increasing pressure on employment and a greater risk of deflation," Caixin's Wang Zhe said. Consistent efforts should be made to ensure policies are implemented effectively to keep up the recovery momentum and lift boost market expectations

China's official nonmanufacturing PMI, which covers both services and construction activity, declined to 51.2 in April from 53 in March, the statistics bureau said. The subindex tracking services activity fell but remained in positive territory, while the construction subindex rose.

As part of efforts to tilt the economy away from heavy infrastructure and property investment, and toward new growth drivers, Beijing has been directing funds into the manufacturing sector as it looks to develop high-tech sectors such as electric vehicles and renewable energy. While this approach has boosted growth, it has also stoked some fears abroad that a flood of cheap Chinese products could hurt other countries' domestic industries. That's raised the prospect of potential tit-for-tat tariffs and trade tensions with the West.

Beijing's doubling down on manufacturing has also led to a lopsided recovery, with consumption, once a key engine of growth, showing signs of slowing.

Looking ahead, ING economist Lynn Song said he expects China's consumption activity to keep moderating this year amid weak consumer confidence and a reluctance to spend.

If policy makers add support for the services sector to existing plans for boosting goods consumption via the "trade-in" programs to upgrade items like cars and household appliances, Song said that "would not only offer a boost to near-term growth but would also be of benefit to China's long-term transition goals."

--Fabiana Negrin Ochoa contributed to this report

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(END) Dow Jones Newswires

04-30-24 0039ET