China: HSBC PMI Improves Slightly for Third Month in a Row

 | Feb 22, 2012 04:10AM ET

  • The flash estimate for the HSBC manufacturing PMI in February improved from 48.8 to 49.7. This is the third month in a row with a slight improvement, but the details were relatively weak with new orders unchanged at 49.1 and the drop in export orders from 50.4 to 47.5 a particular concern.
  • Today’s HSBC manufacturing PMI suggests that GDP growth is improving moderately but that growth remains slightly below trend. With HSBC PMI improving for the third month in a row it also appears that we are in for a soft landing of the Chinese economy at the moment.
    • Details

    The flash estimate for the HSBC manufacturing PMI in February improved to 49.7 (Danske Bank: 50.2) from 48.8 in January. This is the third month in row with a slight increase in the HSBC manufacturing PMI.

    However, the details were relatively weak. The increase in the composite manufacturing PMI was mainly driven by a substantial increase in the current output component from 47.1 to 50.1. The current output component showed a substantial decline in January, suggesting that the development in the current output component is partly due to the Chinese New Year holiday. This year the Chinese New Year holiday was in late January compared to early February last year.

    New orders in February were unchanged at 49.1. As the finished goods inventory component increased, there was a slight deterioration in the new order-inventory balance in February, but we are still off the low reached in December (see chart on next page). More of a concern is the fact that export orders in February dropped from 50.4 to 47.5.

    The output price component in February increased from 44.1 to 47.3, suggesting that the downward pressure on producer prices is easing but that inflationary pressure remains subdued.

    Assessment  & outlook

    For China the message continues to be that the economy appears to be stabilizing, but the level of the HSBC manufacturing PMI still suggests that GDP growth will be slightly below trend in the current quarter. With the HSBC manufacturing PMI improving slightly for the third month in a row, it also appears that we are in for a soft landing of the Chinese economy at the moment. We expect the manufacturing PMIs to continue to improve to the 52-53 range by the end of Q2 12 consistent with GDP growth slightly above trend.

    Today’s HSBC manufacturing PMI suggests that China is avoiding a hard landing and that growth might improve slightly. This in turn suggests that monetary easing in China will continue to be cautious. We expect the reserve requirement to be cut twice more by 50bp in H1 12, but do not expect the leading interest rate to be cut.