A tentative improvement in the Chinese manufacturing sector faltered in March, but the world's third-largest economy still looks to be over the worst of its slowdown, according to a survey released on Wednesday.
An index derived from a survey of purchasing managers for brokers CLSA dipped to 44.8 in March from 45.1 in February as a drop in new domestic orders snapped three consecutive month-on-month increases.
"Although China's proactive monetary and fiscal policies are yielding positive results, the country's economic recovery is still in first gear," commented Jing Ulrich, chairman of China equities at JPMorgan in Hong Kong.
It is the eighth month in a row that CLSA's Purchasing Managers' Index (PMI), designed to provide a timely snapshot of manufacturing conditions, has been below the watershed of 50.
A reading above 50 indicates expansion, while one below 50 points to contraction.
In an interview with the Xinhua news agency, President Hu Jintao said China's prompt moves to support its economy had borne initial fruit.
Speaking before he left for a summit of the G20 rich and emerging powers in London, Hu said China would continue to take economy-friendly steps as part of the global effort to battle the worst financial crisis in generations.
Eric Fishwick, head of economic research at CLSA, said the PMI showed the danger of increasing orders in anticipation of the government's 4 trillion yuan ($585 billion) stimulus package rather than waiting for projects to be actually rolled out.
"A worsening of domestic manufacturing orders lies behind the drop in the PMI and accords with what we are seeing on the ground in the steel industry," Fishwick said in a statement.
Signs of strength
But Andy Rothman, CLSA's China economist, said the PMI offered positive signs for the coming quarters as sub-indexes for output, new export orders and employment all strengthened.
"We continue to believe that the Chinese economy is on track for significant acceleration in the second half of the year," Rothman said in a report.
The contrasting comments of the two CLSA researchers capture the sense among many officials and economists that, while the economy might be pulling out of a deep dive, celebrations would be premature.
Bank lending and investment are showing strength, while property transactions in big cities are recovering. But exports remain chronically weak, while high inventories in the important steel sector have pulled down prices and prompted output cuts.
"Overall, the trend revealed by the recent months' sentiment surveys suggest to us the rate of decline in manufacturing activity likely bottomed out in the last two months of 2008," economists Wensheng Peng and Yan Zheng at Barclays Capital in Hong Kong said in a note to clients.
But they added: "The near-term outlook remains uncertain, with mixed signals from various indicators."
Still, hopes for recovery buoyed the Shanghai stock market whose main index .SSEC tacked on 1.4 percent to its first-quarter gain of 30 percent.
The government's own PMI for March is due to be released on Saturday, and Rothman said it might be significantly stronger than CLSA's index because the compilers use a different process to adjust for seasonal variations.