China's Feb HSBC flash PMI retreats from 2 year high

Tags: China, HSBC, PMI, News
Growth in China's giant manufacturing sector in February pulled back from two-year highs despite

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racking up a fourth consecutive month of expansion, a private survey showed on Monday, as foreign demand remained unsteady.

The HSBC flash purchasing managers' index (PMI) for February slipped to 50.4, the lowest in four months and down from January's final reading of 52.3, which had been the best showing since January 2011.

The flash PMI is the earliest indicator of China's economic health in any month and should not alter expectations that the world's No. 2 economy is enjoying a gentle recovery, a welcome development for the country's new leaders who take office in March.

"The underlying strength of the Chinese growth recovery remains intact, as indicated by still expanding employment and the recent pick-up of credit growth," said Qu Hongbin, an economist at HSBC.

In line with recent trends, the flash PMI showed demand for Chinese exports teetered in February. The new export orders sub-index inched down to 49.8, a hair's breadth from the 50-point mark separating expanding activity from contraction on a monthly basis.

China's export sector has been an Achilles' heel for its economy in the past two years as faltering global economic growth saw net exports drag on growth.

Although export growth surged to 21-month highs in January in a sign that business is picking up, most economists believe exporters face continued difficulty as U.S. and European demand continues to languish.

Still, the flash PMI did not suggest China's factories were re-entering a slowdown. While most PMI sub-indices fell in February, they were pulling back from multi-month highs, suggesting manufacturers were only taking a breather.

Some economists may attribute the dip in February's flash PMI to the Lunar New Year holiday that began on February 10 this year and which fell in January last year, although the survey's publisher, Markit, says the data is seasonally adjusted to account for distortions from holidays.

The output sub-index fell from 22-month highs, new orders backed away from 20-month highs, factory employment edged down from its highest in 20 months, input prices cooled from a 16-month peak, and output prices fell from a 14-month high.

DOMESTIC DEMAND STEADY

As in previous months, February's survey showed domestic demand held up better than that from abroad. The new orders sub-index remained comfortably above 50 even after falling from January.

China holds its annual full-session parliament meeting on March 5 when incoming President Xi Jinping officially takes the reins of state power, while outgoing Premier Wen Jiabao presents the government's 2013 economic targets.

Most analysts believe Beijing will retain its 2012 gross domestic product (GDP) growth target of 7.5 percent this year, thereby giving itself some room to slightly surpass expectations.

China's economy grew 7.8 percent in 2012, roughly in line with investors' expectations, but still the worst growth report in 13 years. Analysts polled by Reuters expect the economy to grow 8.1 percent in 2013.

The rebound, though gentle, would comfort investors banking on a modest Chinese economic recovery to lift global growth.

Indeed, February's flash PMI still marked the fourth consecutive month that the index has been above 50 despite its retreat. Prior to the turnaround that began in November 2012, the index had languished below 50 for 12 straight months.

The HSBC PMI survey is based on a poll of purchasing executives from over 420 manufacturing firms. The flash PMI is compiled from responses from 85 percent to 90 percent of that pool. The final results will be published on March 1.

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