China’s manufacturing activity improved slightly in February owing to increased output and new orders, according to HSBC’s preliminary purchasing managers’ index (PMI) released on Wednesday.
The HSBC flash manufacturing PMI for February rose to a four month high of 50.1, from a reading of 49.7 in January, HSBC said in the report.
A reading above 50 indicates expansion, while anything below that represents contraction.
The output subindex stood at 50.8 in February, up from 50.3 in January, representing a five month high, according to the monthly report.
The new export orders subindex fell to 47.1 this month, the sharpest rate of decline since June 2013, reflecting rising uncertainty in external demand.
“Today’s data pointed to a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February. However, domestic economic activity is likely to remain sluggish and external demand looks uncertain,” said HSBC chief China economist Qu Hongbin.
“We believe more policy easing is still warranted at the current stage to support growth,” Qu added.
Despite the turnaround in the PMI, several worrying signs in the economy can still be observed, according to a research note from Barclays.
“Real interest rates remain elevated due to falling inflation; liquidity conditions continue to be tight, reflecting capital outflows; deflation risks are rising given that core inflation has started to drift lower,” the note said.
It suggested a more accommodative macro policy package, forecasting two 25 basis points (bp) cuts in benchmark interest rates in the first half of 2015 (H1 2015), and two additional 50bp cuts in the reserve requirement ratio.
Nordea Research, in a statement, advised against reading too much into the number “as the Chinese New Year may have distorted the data”.
“We maintain our view that the Chinese economy will stabilise in Q1 but remains fragile to structural risks, such as excess capacity and debt overload in the heavy industrial sectors and the correction in the property market. Economic policy will likely stay accommodative but we expect no rate cut just yet,” said Nordea economist Amy Zhuang.
China’s economy grew 7.4 per cent in 2014, the weakest annual expansion in 24 years, but remains in line with market expectations.
To avoid a sharp slowdown, the central bank cut the benchmark interest rates in November for the first time in more than two years. Earlier this month, it relaxed the amount of reserves banks are required to hold with the central bank, the first such move in more than two years, and injected more liquidity through open market operations.