By Daniel Hunter

Business conditions in China worsened in April following weaker economic data, reports of company defaults and policy announcements about only modest economic stimulus measures.

The MNI China Business Indicator fell to 51.1 in April from a three-month high of 53.4 in March, posting the lowest reading since February. Most measures for short-term business expectations also worsened on the month. The MNI Business Indicator has a strong correlation with GDP and suggests economic growth is likely to ease from the 7.7% growth seen in the fourth quarter of 2013.

The decline in the headline indicator was accompanied by a fall in the New Orders Indicator, which hit the lowest reading since May 2009, and slipped below the 50 breakeven level for the first time since November 2011. In addition, the Inventories Indicator jumped above 50 for the first time in two and a half years, to its highest level since September 2011.

In contrast, labour market conditions recovered sharply in April as firms increased hiring compared with the previous month. The Employment Indicator climbed to a 25-month high of 52.5 in April from 46.1 in March.

Companies continued to report they were being hurt by the exchange rate, however, the negative impact softened for the second month in a row, following the recent depreciation of the yuan that appears to have improved exporters’ sentiment.

Commenting on the data, Chief Economist of MNI Indicators Philip Uglow said: “Our survey shows business activity has weakened with New Orders at a five-year low, adding evidence that the Chinese economy is cooling down with overcapacity remaining a major threat to growth.”

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