(Bloomberg) -- China’s factory activity expanded for a second month, the best streak in more than a year, bolstering hopes that the rebound in the world’s second-biggest economy can be sustained.

The official manufacturing purchasing manager index reached 50.4 in April, the National Bureau of Statistics said on Tuesday, slightly better than forecast. The positive reading — any number above 50 points to an expansion — was echoed by a private measure that showed factory activity growing for six straight months.

The pair of factory gauges offer encouragement to Chinese policymakers who are relying on the country’s industrial producers to offset weak domestic demand and help the economy meet this year’s growth target of around 5%. They are the first major signal of China’s economic activity in the second quarter of 2024, after a bounce in the previous period was followed by a slowdown in March across a slew of indicators.

“New export orders jumped again. This reflects the strength of Western economies, not entirely the domestic one,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “We do, however, see solid consumption on the ground.

Chinese onshore equities were volatile in early trading Tuesday as investors assessed the PMI data. The benchmark CSI 300 Index at one point erased all morning losses and was trading down 0.2% as of the mid-day break. The mainland gauge had rallied for four days in a row and the market will be shut for a holiday from Wednesday.

What Bloomberg Economics Says:

China’s April PMI surveys contained mixed signals. On a positive note, the economy largely maintained momentum thanks to robust construction and production ... But it’s not all positive. Private demand is weak, reflected in notable slowdowns in the growth of new manufacturing orders and services activity.

Chang Shu, Chief Asia Economist

Read the full report here

Beijing is betting that an export-led factory boom can compensate for the country’s real estate slump, although there are mounting geopolitical threats to that strategy. Western countries accuse China of building excess capacity in its industries and dumping cheap products abroad, and warn they may erect new trade barriers. A surprise decline in Chinese industrial profits last month also underscored the risks.

A private survey of factory activity, the Caixin manufacturing purchasing managers index, came in at 51.4 in April, signaling the fastest expansion since Feb. 2023. The Caixin measure largely reflects activity of small and medium-sized Chinese private enterprises, and it’s now been above 50 since November.

Wang Zhe, senior economist at Caixin Insight Group, said in a statement that the expansion was boosted by “exceptional performance in overseas demand” but warned that weak expectations remain a key threat to growth.

Analysts say Beijing will likely need to boost public spending and cut interest rates in order to hit its growth goal, amid concern that a lopsided recovery will be hard to sustain as household spending remains sluggish. The official PMI surveys showed private demand remained weak in April, with slowdowns in the growth of new manufacturing orders and services activity.

“On one hand, it’s good to see expansionary PMI continuing into April. On the other hand, I still will prefer to see more urgency from Beijing in terms of economic support including a sizable Beijing-funded stimulus,” said Xin-Yao Ng, director of investment at abrdn. 

The government is facing calls to step up public spending as companies remain cautious about expanding due to a persisting squeeze on their profit margins. The cost of raw materials rose in both surveys while output prices continued to fall, suggesting it was hard for companies to pass the rising costs to their customers.

“The diverging gap between the two subgauges showed companies’ profit could remain squeezed in the short term,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.

The government could speed up the issuance of new bonds in the coming months to fund infrastructure investment to bolster growth. It’s also rolling out a national plan to provide financial aid to encourage businesses to upgrade equipment and consumers to replace their old home appliances and cars, in a major push this year to boost consumption.

The official non-manufacturing measure of activity in construction and services was 51.2, undershooting a forecast of 52.3 and eased from a March reading of 53.

The Caixin non-manufacturing and composite indexes will be released Monday, after a public holiday in China that lasts several days.

--With assistance from Fran Wang, Charlotte Yang and Zhu Lin.

(Updates with more context and comments throughout)

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