MNI: China Feb PMI To Remain Contractionary, More Rate Cut Seen

China’s official manufacturing Purchasing Manager’s Index will likely print within the contractionary zone at 49% or lower, due to the recent Chinese New Year holiday and the economic recovery’s weak upward momentum, which may push the central bank to cut policy rates in coming months, sources familiar with the index told MNI.

PMI printed at 49.2% in January, the index’s fourth consecutive month in contraction. The National Bureau of Statistics will release the refreshed data on March 1.

The shorter month meant February contained less working days, while production experienced a greater impact due to the longer-than-usual Chinese New Year holiday, people familiar with the data survey told MNI, noting the month-on-month index was highly affected by seasonality.

In addition, the economy still suffered from soft demand despite January’s slight bump, they added. New order and export indexes rose by 0.3 and 1.4 percentage points in January.

The sources told MNI more time was needed to consider whether last month’s recovery would develop into a trend. The Producer Price Index will also likely further decrease month-on-month, which will weigh on PMI, they noted. (See MNI: Soft China Inflation To Persist, Oversupply Will Weigh）

PBOC ACTION

Continued PMI weakness will likely push the People’s Bank of China to ease policy further, the sources added, partially attributing the recent 50bp cut to the reserve requirement ratio in January and the 25bp reduction to the five-year plus loan prime rate this month to the four consecutive months of low PMI since October. (See MNI PBOC WATCH: Hefty 5Y LPR Cut Aimed At Mortgage Support）

The PBOC may cut its policy rates, such as the medium-term lending facilities rate and 7-day reverse repo, by mid-year should PMI remain contractionary and demand fails to improve, they said. (See MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024)

PMI HINTS

According to the Chinese Academy of Science and Technology for Development, China’s Strategic Emerging Industries Purchasing Managers’ Index (EPMI) dropped to 45.5% in February from January’s 50.8%, its first time in contraction since last September. The production index dropped by 10.8pps to 44.1%, thanks largely to Chinese New Year.

However, consumption during the holiday will likely boost the official non-manufactory PMI, as some indicators – such as discretionary spending – increased. The official non-manufactory PMI stood at 50.7% last month, from 50.4% in December.