China Manufacturing Slips, but Don't Worry Yet
Assistant Producer, CNBC
The latest measure of growth in China's vast manufacturing sector may have showed a pullback from two-year highs in February, but don't read too much into the data, economists told CNBC, who maintain that the workshop of the world is still expanding and will keeping growing.
The HSBC flash purchasing managers' index (PMI) slipped to 50.4 for February, the lowest in four months and down from January's final reading of 52.3 – the best showing since January 2011.
(Read more: China's HSBC Flash PMI Retreats From 2-Year High)
Donna Kwok, Greater China economist at HSBC, said despite external demand remaining relatively weak, the index is still above 50, which means the sector is expanding.
The data were also negatively skewed by seasonal factors like the Chinese New Year, she added, which otherwise would have resulted in a higher reading. Chinese New Year began on February 10, and is generally celebrated for two weeks.
"Manufacturing activity has now expanded for four months straight," Kwok in Hong Kong said. "If you take January and February's average reading, that's a better way perhaps to fairly strip out the Chinese new year affect, it was 51.4, which is still higher than the average that we saw in the fourth quarter of 2012 at 50.5."
Other PMI details like improving employment point to optimism among manufacturers that demand conditions will remain in the future, Kwok noted.
"We're expecting the economy to slowly continue its gradual pace of recovery, it will continue to recover on the back of the recent uptick in credit creation - also domestic demand is starting to pick up," Kwok said.
Alistair Chan, economist at Moody's Analytics in Sydney, backed that sentiment saying that while the reading was lower than expected, he still thinks China's manufacturing growth will stay close to trend, and above 50.
"I think the January numbers were a little stronger than expected, I think this is just a natural return to trend," Chan said. "The January numbers were boosted, because of the Lunar New Year, a lot of the factories operated for another week and that probably boosted production and sales. What we're seeing in the February numbers is just a sign of that."
The flash PMI is the earliest indicator of China's economic health in any month and based on a poll of purchasing executives from over 420 manufacturing firms.
Export Orders Down
The flash PMI did, however, show that demand for Chinese exports faltered in February with the new export orders sub-index inching down to 49.8, just below the 50-point mark, a slight contraction on a monthly basis.
Mark Konyn, CEO, Cathay Conning Asset Management said the down tick in manufacturing could be pointing to bigger issues like China's "massive" credit expansion in the fourth quarter not filtering through to industrial production.
China's central bank, the People's Bank of China (PBOC), cut interest rates and the reserve requirement ratio (RRR) for banks twice each last year, in a bid to prop up a slowing economy. The government also in September approved over $150 billion in infrastructure spending, about one fourth of the total size of the stimulus package unveiled in 2008 to boost the economy.
Once this stimulus is wound back, Konyn said the manufacturing sector could "see some moderation."
The PBOC last week moved to drain liquidity from the market for the first time in eight months, leading to speculation whether the world's second largest economy has embarked on a tightening cycle.
(Read more: Is This the Start of China's Tightening Cycle?)
Louis Kuijs, China economist, RBS, said the downturn in exports could be signaling that China's manufacturing industry is once again facing some global headwinds.
"On that order side, things are not on a very firm footing," Kuijs said. "We have seen in terms of how senior policymakers talk about the economy, there has been a little bit of a shift towards thinking about a tighter stance, now if the activity numbers are starting to weaken significantly, that may offset that motivation to tighten."
—By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu