China manufacturing showing signs of fatigue

China's flash manufacturing PMI fell to its lowest level in 4 months in February, with the output index also hitting a 4-month low

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The new export orders component of the HSBC flash China manufacturing PMI index decreased, reversing its trend in February, while output and new orders increased at a slower rate.

Employment also rose at a slower rate and so did input and output prices and the quantity of purchases.

But China’s economy “is still on track for a gradual recovery,” Hongbin Qu, chief economist for China at HSBC, said in a statement.

“Despite the moderation of February’s flash PMI, the index recorded the fourth consecutive reading above the 50 critical line. The underlying strength of Chinese growth recovery remains intact, as indicated by the still-expanding employment and the recent pick-up of credit growth.”

A result above 50 indicates expansion, while below that figure it shows contraction. In February, it was 50.4.

In January, the HSBC flash PMI for China came in at 51.9, above expectations of 51.7 and the highest in 2 years, with many components increasing at a faster rate.

The data is based on between 85% and 90% of total PMI survey responses, and is designed to give an indication of the final PMI data. The final manufacturing survey’s results for February will be released on March 1.

Last month, there was a big gap between HSBC’s final manufacturing data and the official ones, released by the National Bureau of statistics.

Official PMI figures for January showed the index sliding to 50.4 from December’s 50.6, much lower than market estimates of 51, while HSBC final manufacturing PMI showed an improvement, rising to a two-year high of 52.3.

VOLATILE DATA

Analysts advanced various explanations for the difference between the two, with the Chinese New Year but also pollution in China’s biggest cities high among the possible reasons.

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Societe Generale’s China analyst Wei Yao noted that February’s flash reading was much worse than expected, with consensus estimates putting it at 52.2.

“However, we recommend caution in interpreting the figure, as the HSBC index has become more volatile in recent months,” Yao said.

Production and new orders fell more than 2 points each and pulled the headline figure down by 1.3 points, according to Yao, who also said that the weakness showed by the flash PMI data contrasts with the improvement of several other Chinese indicators.

“It seems to us that the timing of this year’s Chinese New Year was at least partially responsible for the surprisingly sharp fall of the flash reading,” she said.

“Hence we do think that actual growth is better than the 50.4 reading implies, though not much better. The economy is still recovering, but the pace of improvement is decelerating.”

The data comes ahead of a meeting of the Chinese Communist Party’s Central Committee starting on Tuesday that will decide on several institutional and economy policy reforms, “not least to further boost growth,” analysts at Raiffeisen Bank noted.

Earlier this month, China’s outgoing cabinet approved reforms to deal with rising income inequality by increasing farmers’ incomes, making it easier for migrant workers to settle in cities, raising the minimum wage or cutting taxes for small companies.

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