PMI seven-month low confounds economists

China's manufacturing activity contracted for the second month in a row in February, hitting a seven-month low and dividing economic opinion.

The HSBC/Markit China flash manufacturing PMI for February dipped to 48.3 from a final reading of 49.5 in January, showing manufacturing conditions deteriorating at a moderate pace in February, said data company Markit in a statement on Thursday.

The flash reading was below the market consensus of 49.5.

According to Markit, new orders fell to 48.1 in February from January's 50.1 and production to 49.2 from 50.8 in January. New export orders rose to 49.3 from January's 48.4.

PMI figures above 50 percent indicate expansion and below 50 percent, contraction.

Commenting on the figure, HSBC's chief China economist Qu Hongbin said February's flash reading moderated as new orders and production contracted, reflecting renewed destocking.

Gathering deflationary pressures imply that underlying manufacturing growth momentum could be weakening, and Beijing policymakers may need to fine tune policy to keep growth steady in the coming year, Qu said.

Lu Ting, chief China economist with Bank of America Merrill Lynch, noted that employment had dropped further below 50. New export orders improved but remained below 50. Inventories of raw materials and finished goods both fell below 50 in February.

Lu believes the data had quite a big impact on the market and said that markets had already been hit in the day.

Both mainland and Hong Kong stock markets fell quickly following the release of the number and both closed lower on the day.

"We suggest downplaying it. The HSBC flash PMI is poor data at the beginning of the year," Lu said in a research note.

The survey period was between Feb. 12 and Feb. 18. The first six days in February were the Chinese New Year holiday, the most important holiday in China. Many small and medium enterprises -- which could be the majority of the HSBC PMI sample -- did not reopen until the middle of February, hence the quality of this flash PMI could be quite low, Lu explained.

In addition, PMI data are heavily seasonally adjusted, but the seasonal adjustment is quite inaccurate due to the different timing of the New Year holidays, Lu said.

China's monthly macro data in January and February are usually distorted by this effect, which is difficult to remove statistically due to the short sample periods and floating dates.

"At the moment, visibility of short-term growth momentum is quite low," he said.

Macro numbers from national statistics agencies have painted a mixed picture this year. Trade and credit expansion were above market estimates and the New Year holiday sales in line with expectations, he added.

Zhang Zhiwei, chief China economist with Japan's Nomura Securities, took a relatively pessimistic view of the reading. He flagged the downside risk on Wednesday as another economic indicator -- the MNI business sentiment index -- also fell.

"We reiterate our view that the recovery in China is not sustainable," he said, adding that China's economic growth could slow to 7.5 percent in the first quarter and further fall to 7.1 percent in the second quarter.

Zhang expected the Chinese government to loosen monetary policy in the second quarter to support growth, if the growth target for 2014 is set at 7.5 percent.