The flash estimate for Markit/HSBC manufacturing PMI in February declined more than expected to 48.3 (consensus: 49.5, DBM: 49.2) from a final reading of 49.5 in January. The details were mixed. New orders declined markedly from 50.1 to 48.1 while new export orders improved from 48.4 to 49.3, underscoring that the current weakness in China is primarily driven by weaker domestic demand. The finished goods inventory component in February again declined below 50, indicating the inventory evident in January stopped in February.
In our view, part of the weakness in February was due to the timing of the Chinese New Year public holiday. As in 2013, the Chinese New Year Public holiday mainly fell in February and this has, in our view, weighed on the HSBC manufacturing PMI in February. Last year the HSBC manufacturing PMI declined from 52.3 in January to 50.4 in February before rebounding to 51.6 in March. We expect a similar pattern this year with a technical rebound in March and a resumption of the downward trend in April.
China continues to face a slowdown in H2 13 driven by the de facto monetary tightening the People's Bank of China (PBoC) has been doing since mid-2013 although we expect the slowdown in growth to be moderate. Admittedly today's HSBC manufacturing PMI suggests increasing downside risk. We expect the HSBC manufacturing PMI to continue to move lower after a technical rebound in March. We expect it to bottom out close to 48 and if the decline proves more substantial we will have to lower our 7.6% GDP forecast for 2014.
In mainland China, the response has been modest as the negative news from the HSBC PMI has partly been offset by a recent marked decline in money market rates - possibly indicating that PBoC could be moving towards a slight easing bias. However, for the global economy and emerging markets in particular, this is negative news and with the US economy also showing weakness and Japan poised to tighten fiscal policy markedly in April, the global economy is starting to look fragile in H1 14.
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