China: Confused Message From Manufacturing Surveys

Now for a spot of considerable confusion from the two monthly surveys of China's huge manufacturing sector.

The official Purchasing Managers Index (PMI), jumped in March to a four month high and is strongly expansionary, but the HSBC/Markit survey fell for the fourth month out of the last five and remains in contraction.

The news will attract an interesting division of analysis: the bears about China will grab the HSBC results to push their case for a hard landing for the economy.

And, the not so bearish or those still bullish about China will use the results of the official survey to support their argument for a soft landing and a continuing of solid growth for the rest of 2012.

Chinese shares lost ground last week, off 3.7%. But they still rose for the quarter.

Chinese markets will be closed for much of the week for holidays, so the market reaction will be driven by investors in the rest of Asia, the US, Europe, starting with Australia this morning.

Some analysts point out that the official survey has a habit of firming in March as industrial production steps up after the holidays and the northern winter.

So in March it jumped one point to a year high of 53.1 and was well above market forecasts for a reading of 50.8%.

The HSBC/Markit Economics fell to a four-month low of 48.3. (A reading great than 50 indicates expansion, one under 50 indicates contraction).

That's slightly better than the 'flash' reading on March 22 of 48.1. In February the final reading was 49.6.

The official survey looks at big companies, the HSBC one reports what's happening among smaller businesses in China.

HSBC said March data showed manufacturing production falling for the fourth time in the past five months.

"Factory output was reduced largely in response to lacklustre demand from domestic and external markets.

"New orders fell at the fastest rate in 2012 so far, while new export business decreased for a second month in succession.

"Manufacturers reduced their employee numbers as a result, while purchasing activity was also down from one month earlier. There was little change on the price front, with factory gate charges falling modestly, and the rate of input cost inflation remaining somewhat subdued.

"For the first quarter as a whole, the index averaged its lowest reading since Q1 2009.

"Companies reported a renewed decline in manufacturing output during March, with the rate of contraction the steepest since November and the second-sharpest in three years.

"Behind the overall decrease in factory output was a further decline in total new business. Underlying demand weakness was broad-based across domestic and external markets, with new export business also falling moderately from one month earlier.

"Rates of decline in both cases were among the sharpest seen since the 08/09 financial crisis."

"As inflation pressures continue to ease, weaker export growth is likely to prompt further easing measures," according to a quote from Qu Hongbin, a Hong Kong-based economist for HSBC.

"Once the easing measures filter through, growth is likely to start bottoming out in the second quarter and rebound modestly in the second half."

Bloomberg explained that "The government-backed PMI is skewed to large enterprises and more affected by seasonality, with the gauge climbing an average of 3.2 points each March from 2005 to 2011 as production returned to normal after a Lunar New Year holiday."

According to comments on Xinhua, the official government news website, "PMI March's reading shows domestic demand rebounding, which was most prominently reflected in the machinery equipment-making industry, according to the report.

"The significant PMI rise in March showed the economy presented stable growth momentum, said Zhang Liqun, a researcher with the development research center of the State Council, China's cabinet.

"The CFLP's sub-index for new orders hit 55.1 percent, up 4.1 percentage points from February. The data for new export orders added 0.8 percentage points to reach 51.9 percent.

"The manufacturing sub-index edged up 1.4 percentage points to 55.2 percent."

A day earlier, China's central bank had issued a statement reaffirming "a prudent" monetary policy stance and said that economic growth is stable and Europe's debt crisis is easing.

The People's Bank of China said it will balance efforts on ensuring stable and relatively fast economic growth, maintaining the overall stability of prices and preventing financial risks.

It will continue moving forward to enhance the pertinence and flexibility of its monetary policy, according to a statement issued after its first-quarter monetary policy report.

"Although uncertainties remain, the country's economic development and financial system are both in line with the expectations of macro-economic regulation," it added.

Shorn of the Chinese officialese, the statement tell us that the central bank will cut rates and asset reserve ratios, but not yet. It has to be convinced that inflation remains under control.

And another report said China's economic growth is expected to ease to 8.2% in the first quarter of this year from 8.9% in the last quarter of 2011.

According to a report issued Saturday by the Bank of China and reported on the Xinhua website, the bank said growth would rise to 8.4% in the second quarter and would remain above 8% for all of this year (the new growth target is 7.5%).