China: NBS manufacturing PMI remains subdued but tentative signs of stabilisation

China’s official manufacturing PMI for February, published by the National Bureau of Statistics (NBS), improved to 49.9 (Consensus 49.7, our estimate 50.0), up from 49.8 in January. This is the first improvement in the NBS manufacturing PMI since July 2014. The non-manufacturing PMI also rose slightly, from 53.7 in January to 53.9 in February.

The details were slightly positive, with new orders improving slightly from 50.2 to 50.4 and export orders also improving marginally from 48.4 to 48.5, although export orders remain subdued. Inventories of finished goods also cut a faster pace in February, with the finished goods inventory component falling to 47.0, from 48.0 in January. Hence, the new order-inventory balance improved in February but overall remains at a neutral level.

Distortions due to the timing of the Chinese New Year public holiday reduce the visibility on January and February data, so we interpret data for these months with caution. While this means compared with the hard data there are in general distortions in the PMIs, the indications are that the distortions in the PMIs have been modest in 2015.

The timing of Chinese New Year in 2015 relatively late in February (18 February to 25 February) is similar to the timing in 2010 (13 February to 19 February) and to some degree in 2013 (8 February to 14 February). In 2010 in particular but also, to some extent, in 2013, the pattern in manufacturing PMIs was a strong January and a weak February, driven mainly by substantial changes in the current output component (see chart below). So, if anything, this suggests that the timing of Chinese New Year this year should have weighed on PMIs in February. The current output in the NBS manufacturing PMI declined to 51.4 in February, from 51.7 in January, indicating a possible slightly negative impact of Chinese New Year. However, in general the volatility in the current output was modest in the two manufacturing PMIs in January and February this year, suggesting that the distortions as a result of Chinese New Year have also been modest.

The slight increase in the NBS manufacturing PMI in February is consistent with the slight improvement seen in the flash estimate for the HSBC/Markit manufacturing PMI, which also improved slightly in February. This suggests the Chinese economy remains relatively subdued but with tentative signs of stabilisation. Looking ahead, we still expect the Chinese PMIs to move moderately higher in coming months, supported by modest monetary easing, stabilisation of the property market and resilient exports. In our view, the year-on-year GDP growth in H1 15 will remain relatively stable above 7% y/y, due partly to favourable year-on-year comparisons.

The Chinese leadership probably does not see the need for aggressive easing currently, particularly if the target for GDP growth in 2015 is cut to 7.0% (in connection with the National People’s Congress starting on 4 March), from 7.5% in 2014. Nonetheless, the People’s Bank of China (PBoC) still has an easing bias and we expect it 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, in our view, the PBoC is unlikely to start targeting a weaker CNY to support growth.