China's new export orders shrank in February the most in eight months, a preliminary HSBC business survey shows, defying expectations of a pick up after Lunar New Year holidays and a worrying sign of the impact of the euro area debt crisis.
Many analysts had expected some rebound in February after imports and exports fell the most in two years in January, when factories closed for several weeks for Lunar New Year holidays.
But HSBC's February flash PMI, which showed the overall manufacturing sector shrinking for the fourth-straight month, suggested overseas demand was sliding even further.
This suggests trade may continue to be disappointing and we cannot see any improvement in the near term, said Kevin Lai, senior economist at Daiwa Capital Markets in Hong Kong.
HSBC flash PMI, the earliest indicator of China's industrial activity, rose to a four-month-high at 49.7 in February from 48.8 in January. The PMI has been below 50, which demarcates expansion from contraction, for most of the last eight months.
The new export orders sub-index dropped to 47.4 -- the lowest in eight months -- from 50.4 in January as the European debt crisis cast a shadow over Chinese exports. Overall new orders were flat at 49.1, a level that indicates they were falling.
An output sub-index rose to 50.1 in February from 47.6 in January.
HSBC said the data, based on 85-90 percent of responses to a monthly survey, suggested further policy easing was needed. The final PMI is subject to revision and will be released March 1.
Growth remains on track for a slowdown, despite the marginal improvement in the headline flash PMI led by quickened production after the Chinese New Year, said Hongbin Qu, HSBC's chief economist for China.
With a meaningful rebound of domestic demand not in sight, external weakness is starting to bite, adding more downside risks to growth. The PBoC, after delivering this year's first RRR cut, should step up policy easing as inflation pressures continue to ease.
China cut its reserve requirement ratio (RRR) by 50 basis points to 20.5 percent on Saturday, releasing about 400 billion yuan ($63 billion) that could be used for bank lending. It was the second 50-bp cut in the RRR in three months.
Shares in Hong Kong <.HSI> and Shanghai <.SSEC> slipped marginally when the flash PMI was published. The commodity-driven Australian dollar, which is particularly sensitive to Chinese data, traded steady around a 3-week low of $1.0634.
China's economic growth is widely seen slowing down in January to March for its fifth consecutive quarter. Economists expect full-year growth to slip below 9 percent for the first time in a decade.
Official trade data for January showed imports and exports falling at their fastest rate since 2009, which analysts said at the time showed an economy weaker-than-previously thought even accounting for distortions caused by the Lunar New Year holidays, which occurred in January.
Factories in China typically shut or run at half speed during Lunar New Year holidays.
The January figures showed that exports to China's biggest market, the European Union, fell 3.2 percent from a year earlier. The euro zone's manufacturing PMI has been below 50, and so contracting, for six months in a row, as the debt crisis stunts the economy.
Reflecting official concern over trade, China's trade ministry is working on detailed policies, including more tax rebates, to try to boost exports.
During the global financial crisis in 2009, Beijing increased the average rebate ratio for exporters to 13.5 percent from 9 percent before the crisis.
Still, China's export growth could slip to 13-15 percent in 2012 from 20.3 percent in 2011, said Liu Li-Gang, chief China economist at ANZ in Hong Kong.
Economists Reuters spoke to since Saturday's reduction in bank reserves said they were sticking with forecasts for further cuts in the RRR this year. A Reuters poll conducted last month showed economists expect a total of 200 basis points of RRR cuts throughout 2012 to 19 percent.
We expect another 2 RRR cuts (this year), the next one could be in late March or early April, said ANZ's Liu.
The central bank may also use open market operations to ease liquidity strains and authorities may relax curbs on the loan-to-deposit ratio requirement so banks can step up lending, analysts say.
Few expect the central bank to cut interest rates though while inflation remains stubbornly above the one-year deposit rate of 3.5 percent for fear it could spark a rush of cash out of deposits and into more speculative investments.
(Additional reporting by Kevin Yao in BEIJING; Editing by Neil Fullick)