FW: Economic Highlights (China) - 03/03/2014 RHB Research Institute [research@rhbgroup.com]

China: Official Manufacturing PMI Dropped to 50.2 in February

• China’s official manufacturing PMI fell for the third consecutive month in Feb, down from 50.5 in Jan to 50.2, the lowest in eight months. The reading was in line with our expectation (OSK-DMG: 50.2, consensus: 50.1), and partly reflected the effect of the Chinese New Year. Historically, China’s manufacturing activities tended to soften around the Lunar New Year period as many factories were closed while migrant workers returned home. This contrasts with the final reading for China’s HSBC manufacturing PMI, which declined from 49.5 in Jan to 48.5 in Feb, signalling a further deterioration in the Chinese manufacturing operating conditions for a second month in a row.

• Details of the official index show that output and new orders both grew at slower rates in Feb, while the other sub-indices were below 50-level, suggesting contraction, except business expectations index. Specifically, new orders index dropped from 50.9 in Jan to 50.5 in Feb, signalling a sustained moderation in domestic demand for the fifth successive month. New export orders meanwhile also contracted for the third consecutive month, with the sub-index falling from 49.3 in Jan to 48.2 in Feb. Reflective of the lower demand and slower activity, output index dropped to a six-month low of 52.6 in Feb from 53.0 in Jan.

• Purchasing activity also decreased, along with further destocking. The purchases of inputs index fell to 49.4 in Feb from 51.0 in Jan, indicating a contraction for the first time since July 2013. The stocks of major inputs index dropped from 47.8 in Jan to 47.4 in Feb, consistent with the lower quantity of purchases. Stocks of finished goods on the other hand continued an eleven-month sequence of contraction and decreased at a slower rate in Feb, further indicating a downturn in demand. Likewise, manufacturing employment contracted for the twenty-first straight month, with the rate of retrenchment quickened compared to the prior month. Upstream cost pressures eased further in Feb, in part reflecting the slowing demand, as the input prices sub-index fell 1.5-pts MoM to 47.7. Nevertheless, business sentiment remained strong. Manufacturers’ business confidence rose to its highest level since April 2013, with the business expectations index up 10.5-pts MoM to 61.8 in Feb, suggesting to us that companies may expand their activity in the months ahead with rising optimism.

• Overall, the latest official PMI data indicate that growth in the Chinese manufacturing sector slowed further in Feb, partly due to distortions from the Chinese New Year and a slow pickup in domestic demand. Meanwhile, the continued contraction in new export orders suggests external demand weakness, which may pose further downside risk to the economic outlook. On a positive note, the recent depreciation of the yuan and further growth in the advanced economies should help improve the near-term export outlook in our view. We believe the upcoming March reading is likely to show an upturn in activity due to the resumption of factory operations after disruption in the Jan-Feb period. Moreover, the solid credit growth in Jan, particularly the strong demand for medium and long-term loans, should bode well for activity in the coming months.