HSBC flash PMI sinks to a 7-month low

China's manufacturing activities are likely to contract for a second consecutive month in February, reaching their lowest point since July, British bank HSBC Holdings Plc said on Thursday.

The manufacturing Purchasing Managers' Index is forecast to drop to a seven-month low of 48.3 from 49.5 in January and 50.5 in December, due to slumps in each sub-index, including output, new orders and employment, HSBC said.

The flash reading of the HSBC manufacturing PMI in February may have reflected renewed destocking activities as new orders and production contracted, said Qu Hongbin, chief economist in China and co-head of Asian Economic Research at the bank.

"The building up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening," said Qu, who still expressed confidence about the government's current policy and possible fine-tuning to stabilize growth.

Louis Kuijs, chief economist in China at the Royal Bank of Scotland, said "not to read too much" into the weak February PMI reading as the Lunar New Year holidays made it difficult to interpret the figure.

"We remain quite confident that most of China's growth drivers remain in place, and the global economy is recovering, and this will help China's economy, too," he said.

Kuijs said the economy will not slow dramatically, because of strong credit and financing support that was released by the central bank.

In January, new loans increased to 1.32 trillion yuan ($218 billion), compared with 482.5 billion yuan in December, and total social financing rose to 2.58 trillion yuan from 1.23 trillion yuan in December, data from the People's Bank of China, the country's central bank, showed. The growth rates of both readings were higher than expected.

The central bank highlighted the facts that the economy's dependence on investment and debt financing continues to rise and that potential risks in the financial sector are the key concerns.

Worries about a further slowdown in the Chinese economy surfaced after the fourth quarter of 2013, when the government released no signals about easing monetary policy in the short term.

The official manufacturing PMI for January dropped to a six-month low of 50.5 from 51 in December and 51.4 in November, lower than market expectations, according to the National Bureau of Statistics.

The China MNI business sentiment index fell further in February to 50.2, compared with 52.2 in January and 58.4 in December, according to a research note from Nomura Securities Co Ltd.

Zhang Zhiwei, chief Chinese economist at Nomura, said: "We continue to believe that China's monetary policy stance has a moderate tightening bias and expect GDP growth to slow to 7.5 percent in the first quarter and 7.1 percent in the second, despite favorable base effects."

In 2013, the growth of the world's second-largest economy slowed to 7.7 percent from 7.8 percent during the third quarter.

The government will likely loosen monetary policy in the second quarter to support the economy if the government decides to keep its 7.5 percent growth target for this year.

A research note from North Square Blue Oak Ltd, a United Kingdom investment bank, said that given concerns regarding the overall slowdown, the government is expected to support more small and medium-sized enterprises in its reform scheme, a potential hot topic in next month's National People's Congress and Chinese People's Political Consultative Conference sessions.

"The State Council has just removed the minimum registered capital requirement for startups and showed more willingness to share more development opportunities in State-owned enterprises reform and government projects," it said.