China flash PMI slips—What are we missing?

Brent Lewin | Bloomberg | Getty Images

China's manufacturing activity slowed to a three-month low in December, a survey from HSBC showed Monday, raising questions about the growth trajectory for the world's second largest economy.

The HSBC flash purchasing managers' index (PMI) fell to 50.5 for the month, compared to 50.8 in November. Sub-indexes tracking new orders and new export orders increased at a faster rate, while employment and stocks of purchases decreased at a faster rate.

Still, the figure has remained above the 50 mark, which demarcates expansion from contraction, for five months now, which explains why most analysts CNBC spoke to remain sanguine about the data.

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Why Chinese firms are in a sweet spot

Hongbin Qu, chief China economist and co-head of Asian economic research at HSBC, said December's flash reading stands above the average for the third quarter, implying the recovery in the manufacturing sector remains intact.

Hongbin added that he expects the country's gross domestic product (GDP) growth to stabilize at 7.8 percent in the fourth quarter.

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Alaistair Chan, economist at Moody's Analytics agreed the reading was "broadly optimistic" with both domestic and export-oriented manufacturers seeing rising orders.

"I think they are in a fairly sweet spot. I don't see much pressure coming from the demand side so I think firms will be quite happy heading into the holiday season," he told CNBC.

China's economy has slowed to multi-year lows this year, and is expected to ease further in 2014 as the new leadership shifts its focus from growth to structural reforms.

Implications of China's demographic changes

Zhiwei Zhang, chief China economist at Nomura, said the data suggest growth momentum has started to weaken.

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"We believe this trend will continue in first half of 2014, as market interest rates keep rising and pushing up financing costs for corporates," Zhang wrote in a note.

Market players also reacted negatively to the PMI reading, with the Australia dollar, which is highly sensitive to Chinese data because of its dependence on the mainland in exports, slipping 0.3 percent to inch closer to a new three-and-a-half month low against the greenback.

The benchmark Shanghai Composite fell to its lowest level since November 18 following the data.

The survey covered a shortened period from December 5 to 12, given the upcoming holiday season. The final reading will be released on January 2.

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