China manufacturing index drops sharply amid slowdown concerns

Activity in China's factories was down in February, according to a preliminary private survey today, which reinforced concerns of a minor slowdown in the economy and hurting markets across the region.

The flash Markit / HSBC Purchasing Managers' Index (PMI) was down to a seven-month low of 48.3 in February from the final reading of 49.5 in January, where a reading below 50 indicated a contraction while one above showed expansion.

The Lunar New Year festival, which got underway 31 January and covered early February, likely affected factory output, with manufacturers shutting shop for the country's biggest annual holiday, according to commentators.

The Shanghai Composite Index shed its early gains on the news, even as Asian markets tumbled.

The yield on benchmark 10-year Treasury notes was down to 2.712 per cent after the China flash PMI report, as against yesterday's US close of 2.734 per cent.

Reuters quoted Stephen Green, an economist with Standard Chartered bank as saying, it looked like across-the-board weakness.

He added, the indexes needed to be more correlated with the export economy than the domestic economy and that it was slightly surprising given stronger export numbers that had been seen in the last couple of months.

The unexpected drop in the flash PMI prompted a number of economists to offer reasons the data might not be representative of the full picture of Chinese factories, MarketWatch reported.

''We need to remember that there is still an element of the Chinese New Year playing out here. This is the flash number and the final number comes out on March 3,'' Kim Eng Securities strategist Andrew Sullivan said.

Agreeing, Bank of America-Merrill Lynch economists Ting Lu and Xiaojia Zhi agreed, ''Our suggestion is still to downplay (the result) due to the poor quality of this HSBC flash PMI'' on the early months of the year.

They pointed out that the survey was conducted during 12-18 February, and many of the smaller firms, ''which could be the majority of the HSBC PMI sample, were not open until mid-Feb, so the quality of this flash PMI could be quite low.''

''Also note that PMI data are heavily seasonally adjusted, but the seasonal adjustment is quite inaccurate due to the different timing of Chinese New Year holidays and short record (since year 2005),'' they said, adding that the data set ''did a poor job in predicting turning points of the Chinese economy in the past two years.''