Factory activity edges back into expansion zone

Flash PMI offers mixed signals, with new export orders sinking in Feb

Manufacturing activity in China is likely to have rebounded this month, HSBC Holdings Plc said on Wednesday as it released the flash estimate of the Purchasing Managers Index.

The final PMI is expected to show a rebound for February that will take it back to expansion after two months of contraction, the bank said. The manufacturing PMI was estimated at a four-month high of 50.1, compared with January's level of 49.7 and December's 49.6 reading, as output and new orders both expanded slightly, said the bank.

A reading above 50 indicates expansion, while one below 50 signals contraction. The output sub-index rose to 50.8 in February from 50.3 in January, reaching a five-month high, according to HSBC.

The official manufacturing and services PMI figures will be released by the National Bureau of Statistics on Sunday. HSBC's final PMI data will be released a day later.

Qu Hongbin, chief economist in China and co-head of Asian economic research at HSBC, said that the PMI had improved thanks to firmer domestic demand.

However, new export orders contracted for the first time since April 2014, with the sub-index sinking three points to 47.1 this month, the sharpest fall since June 2013.

Both input and output prices continued to sink. "Domestic economic activity is likely to remain sluggish and external demand looks uncertain. We believe more policy easing is still warranted at the current stage to support growth," said Qu.

Chang Jian, chief China economist at Barclays Capital, noted "worrying signs" in the economy despite the better-than-expected PMI reading. Deflation risks are rising and liquidity conditions remain tight, he said.

"China's economy will be subject to both cyclical and structural challenges in the near term," she said. "The People's Bank of China may focus more on near-term liquidity conditions as capital outflows are accelerating due to the upcoming start of the US Federal Reserve's expected rate hikes in the second quarter of this year."

Chang forecast two 25 basis-point cuts in China's benchmark interest rates in the first half of 2015 and two additional 50 bps cuts in banks' reserve requirement ratio.