China's twin PMI data show a mixed picture

China growth may only bottom out in Q2: HSBC
China growth may only bottom out in Q2: HSBC

Data on China's manufacturing sector showed a mixed picture on Tuesday.

The official Purchasing Managers' Index (PMI), released by the National Bureau of Statistics, came in at 50.3, a touch higher than the 50.2 reading in February, and staying above the 50 mark which demarcates expansion and contraction.

However, the final HSBC PMI reading for March came in at an eight-month low of 48, compared with the flash estimate of 48.1 out last week.

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"On average, I think it's still clear that the economy hasn't really pulled out of its rut for the year," Frederic Neumann, managing director and co-head of Asian economics research at HSBC told CNBC.

"You had this expectation that after Chinese New Year, the economy will roar back. But so far, it's challenging and perhaps the bottom of growth might be only in the second-quarter, not the first-quarter," he said.

The Australian dollar, which is especially sensitive to China's data given Australia's huge trade links to the mainland, rose earlier on the official data, but eased slightly following the HSBC figures.

A Chinese manufacturing worker.
TPG | Getty Images

The mixed readings will do little to alleviate concerns over the world's second-biggest economy, which has been hit by a slew of disappointing economic data and fears over corporate debt defaults and credit concerns.

"The bigger story here is the continuation of a growth squeeze, where you have more and more bad debt building up," said Patrick Chovanec, Chief Strategist at Silvercrest Asset Management.

"You see signs of financial stress, but more importantly, even when that financial stress sort of rush onto the rut, it eats up the available credit and there's less and less that's generating real growth in the economy. And so you get a growth squeeze that's playing out now," he added.

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There has been increased speculation in recent weeks that China may soon unleash a new round of monetary stimulus to boost the economy. Chinese Premier Li Keqiang said last week that necessary policies were in place and the government will push ahead with infrastructure investment.

"I think even officials are getting a little jittery about the underlying outlook and that suggests they might fine tune economic policies to lift growth a little bit," HSBC's Neumann said.

This is the issue for Chinese manufacturers
This is the issue for Chinese manufacturers

Jian Chang of Barclays offers a slightly more sanguine view.

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"Our view is that the NBS [National Bureau of Statistics] PMI gives a better picture of overall economic conditions given its greater sample size (3,000 vs about 420 in the HSBC survey), larger industry coverage and longer sample period," he said.

"It is also noteworthy that the improvement in the NBS PMI came about despite the drag from domestic restructuring efforts – as the government tries to reduce excess capacity in five major industries, particularly steel and cement," he added.