January economic data too murky to declare rocky spell

The central bank caught the market by surprise on Wednesday and lowered banks' reserve requirement ratio (RRR), following slack factory activity in January, fueling concerns that the world's second-largest economy has a rocky spell ahead.

However, bearish predictors might be reading too much into incomplete economic data coupled with the central bank's decision, as this monetary easing move is more about easing liquidity pressure ahead of Chinese New Year, a period known for its murky economic data.

RRR adjustments should not just be regarded as direct monetary loosening or tightening in China: It is also an key tool to cushion foreign capital inflows and outflows.

Gone are the days when abundant foreign exchange accumulation powered base money growth, as China's trade and investment balances both neared equilibrium last year, which meant the lowering of RRR was needed to fill the role.

January's economic data painted a worrying picture. China's factory activity slumped further by dropping below the 50-point boom-bust line for the first time in over two years, with tumbling raw material inventories and strained labor conditions.

However, we must remember the timing of this poor performance sheet. Chinese New Year has always come with statistical concern, as seasonal PMI data is heavily adjusted, making it inaccurate as the Lunar New Year falls on a different date each year.

Therefore, this situation impedes the extensive and credible assessment of underlying growth momentum.

It should also be noted that manufacturing activity is only part of China's economy, which is undergoing structural reform, and the service sector's performance is gaining more sway.

Despite softer growth of activity and new businesses, service providers appeared optimistic of the 12 month business outlook at the start of the year, the degree of positive sentiment was the strongest seen in 10 months.

It is just too early to spell boom or gloom for China's economy. The underlying strength of real economy remains to be revealed as China gradually flexes its muscles to brace slower but steady and sustainable growth.