GO
Loading...

Should Investors Take Comfort in Latest China PMI?

Stringer | AFP | Getty Images

With recent Chinese economic data offering mixed signals over the health of the world's second largest economy, should investors take comfort from the HSBC's flash manufacturing Purchasing Managers Index (PMI) for March that came in above expectations?

HSBC's flash China PMI, the first indicator of the strength of the country's economic recovery without a Lunar New Year holiday distortion, rebounded to 51.7 in March - compared to forecasts for a rise to 50.8 - helped by an increase in new orders including export orders.

(Read More: China HSBC Flash PMI Rises After Holiday Dip)

Last month, the private sector index dropped to a four month low of 50.4. A reading above 50 indicates expanding activity and one below 50 signals contraction. During the Lunar New Year holidays - which fell in February this year - businesses close down for a two-week period, translating into a period of slower economic activity in the country.

According to Raymond Yeung, senior economist, Greater China at ANZ, the data indicate growth momentum remains intact, adding that the rise in new orders is an encouraging sign that domestic demand is picking up steadily.

"If the official PMI reflects the same as what we see today [Thursday], then the Chinese economy can achieve 8 percent growth in the first quarter," Yeung told CNBC.

The official numbers on manufacturing activity are expected on April 1.

Shuang Ding, senior China economist at Citi Investment Research, agreed that the growth recovery is on track, but noted that manufacturing data do not signal a strong rebound in the economy. "Investors should be given some comfort that growth in the near-term should not be a problem. But we don't expect a major acceleration," he said.

(Read More: China's Colossal Credit Bubble Next Big Risk: Faber)

Shuang added that while growth may remain above 8 percent in the first-half, it could fall below that level in the second-half as the central bank shifts from an easing bias to a neutral stance to contain inflationary pressures.

In addition, the muted global economic recovery is unlikely to provide much support to the country's export market, he noted. For the full year, Shuang expects gross domestic product (GDP) growth of 7.8 percent - matching the pace of expansion in 2012.

(Read More: China PutsFocus on Consumers to Drive Growth)

While manufacturing and housing construction have shown some strength, other key areas of the economy have underperformed expectations.

Industrial output and retail sales data for the January-February period, for example, came in below market expectations, which economists say highlights the fragility of the recovery.

Industrial output rose 9.9 percent in the first two months of 2013 from a year earlier, missing expectations of a 10.5 percent rise. While retail sales slowed to 12.3 percent from 15.2 percent in December, missing analyst forecasts for an increase of 15 percent

By CNBC.com's Ansuya Harjani, Follow her on Twitter: @Ansuya_H

Featured