China's big factories rebound as smaller firms lag

Thu Mar 1, 2012 6:25am EST
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By Kevin Yao and Aileen Wang

BEIJING (Reuters) - China's factories grew more than expected in February as new export orders for big firms bounced back, a government survey showed, while a private-sector report portrayed a different picture of smaller companies lagging behind the rebound.

China's official purchasing managers' index (PMI) rose to 51.0, above expectations of 50.7 and higher than 50.5 in January, while the final reading of the HSBC PMI stood at 49.6, a shade higher than January's reading of 48.8, but still under the 50-point threshold demarcating expansion from contraction.

Export orders showed a bigger divergence, with the government's new export orders sub-index rising to 51.1 in February, the first indication of expansion in four months and the highest reading since May 2011.

The HSBC PMI export sub-index slid to an eight-month trough of 47.5, suggesting orders were shrinking.

It is not uncommon for the two data series to diverge in their findings. They use differing survey samples and the government survey is only partially seasonally adjusted -- a vital distinction given the Chinese Lunar New Year holiday disruption to production cycles.

"In the past six years, the month after Chinese New Year always saw a rise of PMI readings. Therefore, PMI data in January and February should be taken with a grain of salt," Ting Lu, China economist with Bank of America/Merrill Lynch in Hong Kong wrote in a note to clients.

The twin data sets underline that a rebound in the vast Chinese factory sector should prevent a hard economic landing, but that it has yet to be secured, signaling to analysts that it is too early to think that the government will ease back from pro-growth fine-tuning of economic policy.

The market perception is that small firms in particular are in need of the banking system liquidity and other support that the government has unveiled in a series of policy tweaks since its fine-tuning campaign started in the second half of 2011.   Continued...