China PMI Report Fails to Confirm Manufacturing on Path to Recovery

Asian-Pacific shares were mostly lower on Tuesday amid new concerns over a slowing economy in China after data released earlier in the session showed manufacturing activity grew slower than expected in April. However, optimism over the start of trade negotiations between the U.S. and China, which are set to resume in Beijing later in the day, may have underpinned prices.

At 06:12 GMT, Hong Kong’s Hang Seng Index was at 29723.90, down 168.91 or -0.57 percent. South Korea’s KOSPI Index was trading 2207.73, down 8.70 or -0.39 percent and Japan’s market remained closed due to a 10-day holiday, scheduled to end on May 6.

Surprisingly, China’s Shanghai Index was trading 3072.52, up 10.02 or +0.33%. Oversold conditions contributed to that move after last week’s 5.5% sell-off. As anticipated after the weak data from China was released, Australia’s S&P/ASX 200 is trading 6331.60, down 27.90 or -0.44.

China’s Economy is Still Bottoming

The catalyst behind most of the price action was China’s official Purchasing Managers’ Index (PMI), which fell below expectations in April. The data came in at 50.1 for the month of April. Traders were looking for the figure to come in unchanged at 50.5. Even though the data dipped from the prior month, the number remained above 50, which indicates expansion, while a reading below this level signals contraction.

I don’t think investors should over-react to the dip because China’s economy is still trying to find a bottom so there are going to be several stops and starts before the recovery gains traction. The combination of government stimulus and an impending U.S.-China trade deal is likely to be the catalysts behind that trend.

Furthermore, if you recall from a month ago, factory activity in China unexpectedly grew for the first time in four months in March. At that time, analysts were suggesting that government stimulus measures may be starting to take hold in the world’s second largest economy.

Given the surprise jump in March and the slight dip in April, the report for May is going to be most important because the economy could either revert to a weaker trend, or push higher. If sustained next month, the improvement in business conditions would indicate that manufacturing is on a path to recovery, easing fears that China could slip into a sharper economic slowdown.