China: HSBC PMI improves in February

China: HSBC PMI improves in February, major distortions from Chinese New Year unlikely

The flash estimate for the HSBC/Markit manufacturing PMI in February improved to 50.1 (consensus: 49.5, DBM: 49.7) from a final reading of 49.7 in January. This is the second month in a row with a slight increase in the HSBC/Markit manufacturing PMI and it is now at its highest level since October.

The details were mixed with new orders improving slightly to 50.4 from 50.1 but export orders declining markedly to 47.1 from 50.2. The inventory of finished goods component increased slightly to 50.2 from 49.5, whereas the new order-inventory balance has deteriorated slightly in recent months but overall remains at a relatively neutral level.

We are in the season with less data visibility due to distortions from the timing of the Chinese New Year holiday and we should probably interpret today’s HSBC/manufacturing PMIs cautiously. That said, there is probably less distortion in the manufacturing PMIs than in the hard economic data and it appears that the distortion in the HSBC /manufacturing PMI has been modest.

The timing of the Chinese New Year in 2015 (18-25 February) was most similar to the timing in 2010 (13-19 February) and to some degree 2013 (8-14 February). However, in both 2010 and 2013 the manufacturing PMI was strong in January and weak in February, which, if anything, suggests that the timing of the Chinese New Year this year should have weighed on the PMI in February. In addition, the volatility in the PMIs in connection with the Chinese New Year is usually driven by volatility in the current output component but this has been modest in January and February. Current output in February improved to 50.8 in February from 50.3 and 49.9 in January and December respectively.

Hence, the overall picture appears to be a subdued Chinese economy that has started to stabilise. GDP in H1 15 will in our view remain relatively stable above 7% y/y due to favourable comparisons. Last year the manufacturing PMI declined markedly in Q1 with current output in the HSBC/Markit manufacturing PMI bottoming out at 47.2 in March (the current level is 50.8). We still expect the Chinese PMIs to move moderately higher in the coming months, supported by modest monetary easing, stabilisation in the property market and resilient exports.

The Chinese leadership probably does not see the need for aggressive easing at the moment, particularly if the target for GDP growth in 2015 is cut to 7.0% (in connection with the National People’s Congress in March) from 7.5% in 2014. Nonetheless, People’s Bank of China (PBoC) still has an easing bias and we expect PBoC to cut the reserve requirement by at least 50bp, not least because recent capital outflows and intervention in the FX market have drained some liquidity in the interbank market. We doubt the interest rate will be cut further and PBoC in our view is unlikely to start targeting a weaker CNY to support growth.