China Manufacturing Indicator Drops to Seven-Month Low

HSBC’s Purchasing Managers’ Index (PMI) shows that manufacturing activity in China hit a seven-month low in February. Reuters reports on the PMI’s release and the affect it had on international markets:

The flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to a seven-month low of 48.3 in February from January’s final reading of 49.5, where a reading below 50 indicates a contraction while one above shows expansion.

[...] The Shanghai Composite Index .SSEC gave up its early gains on the news, while Asian markets tumbled.

The yield on benchmark 10-year Treasury notes fell to 2.712 percent after the China flash PMI report, compared with Wednesday’s U.S. close of 2.734 percent.

The yen, which often gains in line with investors’ aversion to risk, got a leg up against its rivals after the China flash PMI report. The dollar’s early gains unraveled and it slipped 0.3 percent to 101.97 yen, moving further away from a two-week high of 102.73 yen hit on Tuesday. [Source]

While some analysts are viewing the PMI as an indication that China’s economy needs more government support, others are warning against being alarmed by the new numbers. The Wall Street Journal reports:

[...] HSBC economist Qu Hongbin said that China needs to make policy adjustments to ensure sufficient momentum in the economy. “We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year,” he said.

[...] Nomura economist Zhiwei Zhang said he expects Beijing to act. “We reiterate our view that the recovery in China is not sustainable and that GDP growth will slow to 7.5% year on year in the first quarter and 7.1% in the second quarter despite favorable base effects,” he said, adding, “we expect the government to loosen monetary policy in the second quarter to support growth.”

But others said that the weak measure of the nation’s manufacturing health was partly due to the timing of the Chinese Lunar New Year holiday.

They also noted that government policy makers have so far been comfortable with slightly slower growth, though they are carefully watching the employment situation.

[...] “The markets are definitely moving on the PMI data,” said Tim Condon, economist at ING. “But the Chinese economy is not undergoing a crash by any means.”

The concern over sluggish growth in China after the seven-month low PMI caused the Australian dollar to slip and caused slight drops on Asian stock markets. Meanwhile, the Financial Times reports that sentiment on Wall Street appears to be little affected, and commentary from the Sydney Morning Herald gives a list of reasons not to be shocked or horrified by a modest slump in China manufacturing.

February 20, 2014 3:47 PM
Posted By: