China: Seasonal Distortions‏ Cause Drop In HSBC PMI

The flash estimate for HSBC manufacturing PMI dropped from 52.3 in January to 50.4 in February, suggesting that the Chinese economy has again started to lose momentum. However, February data is distorted by a negative impact from the Chinese New Year holiday, and this is probably the main explanation for the decline.

The data released so far in 2013 suggests that distortions from the Chinese New Year holiday, have been unusually large in January and February and we will probably not have a clear view of the Chinese economy until the March data is released. While the weak HSBC PMI in February suggests downside risk, our view remains that the manufacturing PMI remains on a moderate recovery trend. We expect the PMIs to peak around 53 in late Q2 13.

Details
The flash estimate for HSBC manufacturing PMI in February declined markedly to 50.4 (consensus 52.2, DBM 52.0) from a final reading of 52.3 in January. There was weakness across the board with new orders declining from 53.7 to 51.2, and export orders declining from 50.5 to 49.8.

This year the Chinese New Year holiday was in February - compared with January last year. Hence, in 2013, the distortions from the Chinese New Year will tend to depress activity measures in February. The Chinese New Year holiday lasts one to two weeks. The official public holiday this year was February 9-15, but for many private companies it was celebrated last week, so activity is only gradually returning to normal this week. According to the Markit/HSBC press release, the data for the February flash estimate was collected over February 12-21 , and largely covered the Chinese New Year holiday with potential for a particularly large distortion this year.

Assessment & Outlook
We should be careful about reading too much into the decline in the HSBC manufacturing PMI in February. As evident in other data such as the foreign trade data, it appears that the distortions from the timing of the Chinese New Year holiday have been unusually large this year. In our view, this is the main explanation for the decline in flash HSBC manufacturing PMI in February, and we expect it to rebound by 1-2 points in March. In general we are currently in the season where there is little transparency in the data due to the seasonal distortions, and we will really not have a clear view of the state of the Chinese economy until March data is released. We still expect GDP growth to accelerate moderately in H1 13 before easing slightly in H2 13. Our view is consistent with the manufacturing PMIs peaking around 53 in late Q2 13. Admittedly, the weak flash HSBC manufacturing PMI suggests there could be some downside risk to our forecast.

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