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Overoptimism on China's economy
Wed, 27 Feb Pre-Open

After seven quarters of slowdown, the Chinese economy showed signs of a pickup in the quarter ending December 2012. The data gave hope to economists that the worst was perhaps over. However, barely a month has passed, and signals that the recovery expectations might be premature have already started flowing in. At the core of the skepticism on turnaround is a weak manufacturing (private) survey outcome that suggests that China's manufacturing is expanding at the slowest pace in four months. Considering that manufacturing is the core of the Chinese economy, the optimism on Chinese recovery might indeed be misplaced.

The preliminary reading of HSBC's Purchasing Managers' Index (flash PMI) for the month of February is lower than what was seen in January and consensus estimates. At 50.4, the PMI is barely above the critical level (a number above 50 suggests expansion while a number below 50 suggests contraction) and looks precarious. And this is not the only factor overshadowing Chinese economic growth. There are further concerns that expansion in the property markets will be restricted to counter house price inflation. The same were reflected in the biggest drop since May 11 in Shanghai Composite Index last week.

However, not all economic statistics are suggesting a slowdown. Employment is still expanding and credit growth has picked up. The country's exports have surpassed previous estimates suggesting a rebound in the economic momentum. But one should keep in mind that the data in the first two months is distorted by the weeklong Chinese Lunar New Year holiday (which was in January last year and February this year).With these mixed signals and views, perhaps it would be best to wait for the beginning of next month when HSBC and Markit will report the final February PMI reading along with the Government backed PMI release. Till then, we would rather err on the side of caution and remain skeptical regarding Chinese economic recovery.

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