2nd Ld-Writethru: Caixin China manufacturing PMI edges down to 49.4

The latest Caixin General China Manufacturing Purchasing Managers' Index (PMI), an indicator of manufacturing activity, edged down to 49.4 in April, suggesting the economic recovery is yet to firm up.

The private survey, conducted by financial information service provider Markit and sponsored by financial media group Caixin, produced a reading on Tuesday fractionally down from 49.7 in March and below the market forecast of 49.8, signalling marginal deterioration in operating conditions.

A reading above 50 indicates expansion, while a reading below 50 represents contraction. The Caixin index has remained below the neutral 50 value for more than a year.

China's stock market headed upward despite the disappointing data, with the key Shanghai stock index rising over 1 percent in the morning session.

The survey found relatively weak market conditions and softer client demand had led firms to be cautious towards their production schedules, while new order books stagnated following a slight expansion in the previous month.

Meanwhile, weaker foreign demand continued to weigh on orders, with new export work falling for a fifth consecutive month.

Companies displayed cautious inventory policies in April, with stocks of finished goods and inputs both falling at faster rates.

"Overall, the data showed the foundation of China's economic recovery was yet to solidify and the government still needs to pay attention to downside risks," said He Fan, chief economist at the Caixin Insight Group.

The data came on the heels of the official PMI, which showed manufacturing activity expanded for a second month in a row in April.

The official PMI came in at 50.1 last month, slightly down from March's 50.2, according to data released by the National Bureau of Statistics and the China Federation of Logistics and Purchasing on Sunday.

The official PMI samples 3,000 relatively large enterprises in China. The Caixin PMI samples 420 small and medium-sized manufacturing enterprises and is relatively volatile due to its small sample size and the dominance of small enterprises.

Bloomberg economist Tom Orlik suggested keeping small movements in the Caixin index in perspective -- with a sample of 420 firm, a move of 0.3 points may reflect a change in conditions for just a handful of them.

"The Caixin reading is broadly consistent with the official PMI and other early indicators for April, showing the economy isn't falling back into a slump, but isn't accelerating either," Orlik wrote in a research note.

China's economy expanded 6.7 percent year on year in the first quarter, slowing further from the previous quarter but better than many had feared with a string of encouraging indicators.

Authorities have taken a slew of measures since last year to mitigate the downshift, cutting interest rates, reducing taxes and slashing overcapacity.

Orlik reckons the stimulus will continue to provide tailwinds in the months ahead, but with lending rising at a rapid clip, the central bank will be in wait-and-see mode before deciding on further rate cuts.

In a report released on Tuesday, China International Capital Corporation Limited forecast real GDP growth to pick up to 6.9 percent in the second quarter and CPI growth to remain at 2 percent.

"In short, economic reflation is likely to continue in the second quarter," the report said. Endi