China gains steam in manufacturing
China's manufacturing activity improved better than expected last month, but economists say more monetary loosening is needed to sustain the positive trend.
The purchasing managers' index (PMI) compiled by the China Federation of Logistics and Purchasing on behalf of the National Bureau of Statistics, edged up to 51 from 50.5 in January, marginally ahead of a consensus forecast of 50.9.
The PMI is a measure of manufacturing activity. A value above 50 indicates expansion, while below 50 indicates contraction. The official measure has now risen for three straight months and sub-indexes show expansion almost across the board, from new orders to output and imports.
Another PMI compiled by HSBC/Markit, showed a small contraction in activity, with the index for February measured at 49.6. But that was up from 48.8 in January.
Economists said the improvement in manufacturing activity was helped by the decision by Beijing in November to cut the proportion of reserves it required banks to set aside.
'The continued rise in the official PMI is encouraging,' said Daiwa Capital Markets chief economist Sun Mingchun yesterday.
'We believe continued monetary loosening is needed to enforce this favourable trend,' the analyst said.
The improvement in manufacturing activity failed to boost the stock market yesterday. The Hang Seng benchmark index dropped 292 points, or 1.34 per cent, to 21,387, dragged down by news of share placements of property and banking stocks, while the Shanghai Composite Index was barely changed, up 2 points to 2,426.
The PMI indexes were subject to seasonal changes because the Lunar New Year holiday fell in January this year but in February last year. This means there were more working days last month than the same period last year.
Following another cut in the reserve requirement ratio two weeks ago - the second in three months - many economists anticipate that two to four further cuts are on the cards in the coming months.
Commenting on the HSBC/Markit PMI, HSBC chief economist Qu Hongbin said deteriorating external demand arising from the unsettling debt crisis in Europe, and economic turmoil in the United States, were adding more downside risks to the prospects of economic growth on the mainland.
Economists with Goldman Sachs, Societe Generale, Citi, and Bank of America Merrill Lynch said other macro-economic indicators due out next week - including industrial output, trade, fixed-asset investment and retail sales - would provide a more complete picture of the mainland's latest economic health.
Premier Wen Jiabao, who is due to reveal his working report at the opening of the annual National People's Congress on Monday, said last month that the central government would consider macro-economic performance in the first quarter and take prompt reaction accordingly to 'fine-tune' its policy for the rest of this year.
The official PMI is based on a poll of 820 manufacturers around the mainland, while the HSBC/Markit PMI surveyed 430 producers largely in coastal regions.
10%
Metal demand in China, the biggest consumer of copper and aluminium, is forecast to grow this much in 2012, Bloomberg says
