Economists Remain Upbeat Despite China's Flash Manufacturing PMI Registering Unexpected Fall In February

China manufacturing activity dropped to a four-month low of 50.4 in February pulling back from a two-year-high of 52.3 recorded in January, a survey by HSBC-Markit showed Monday. However, the survey hastened to add that slip in the manufacturing activity should not be taken as an indicator of slowing growth in the Chinese economy.

This was further reiterated by the Bank of America Merrill Lynch economist Ting Lu, who said in a statement: "We suggest not taking this flash PMI seriously as this PMI data point was heavily distorted by the Chinese New Year holiday," the Business Insider reported.

The HSBC flash Purchasing Managers' Index (PMI) - the earliest indicator of Chinese economic activity that comes a week ahead of the final HSBC PMI - expanded for the fourth consecutive month in February but fell short of the analysts’ expectation of 52.2. A reading above 50 indicates expansion.

The survey attributed the decline in the Chinese manufacturing activity to a teetering foreign demand as a slow economic recovery in the euro zone and other foreign markets weigh in. The new export orders sub-index inched down to 49.8, a fraction less than the 50-point mark that separates expanding activity from contraction.

"The Chinese economy is still on track for a gradual recovery. Despite the moderation of February’s flash PMI, the index recorded the fourth consecutive reading above the 50 critical line. The underlying strength of the Chinese growth recovery remains intact, as indicated by still expanding employment and the recent pick-up of credit growth," Qu Hongbin, an economist at HSBC said.

Although the exports slowed down in February from the 21-month high in January, economists believe that pulling back from multi-month highs do not depict a slowdown in the sector. Besides, economists also point out that the PMI data for February is not a true indicator of the Chinese manufacturing activity as the lunar holidays, which fell on February this year renders the data inaccurate. Although HSBC's claim that the PMI data is seasonally adjusted to account for the holidays, some economists argue that such adjustments are inaccurate given the different timings of the Chinese New Year.

“Neither the NBS nor the HSBC could do a good job in creating PMI during the Chinese New Year holiday. First, there could be a large amount of missing values for already small sample sizes (HSBC at around 500, NBS at 3000) due to the holiday. This is especially true for the HSBC February flash PMI this year as the holiday was from Feb. 9 to 15 and the private sector’s holiday could last until end-Feb,” he added.