Why it’s pointless to worry about China’s crummy February manufacturing data

The Chinese New Year shopping frenzy that probably distorted closely watched manufacturing data for February.
The Chinese New Year shopping frenzy that probably distorted closely watched manufacturing data for February.
Image: AP Photo/Eugene Hoshiko
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Chinese factories’ fortunes stalled last month, according to a closely followed report. A preliminary survey by HSBC of manufacturing activity in China last month, called “Flash PMI”, showed Chinese factories’ business expanded at the slowest pace in four months in February.

World markets duly reacted to the news, with the Australian dollar falling on fears the nation’s biggest trading partner is slowing down and the Brent oil price softening. Journalists extrapolated from the data that China’s commodities demand was set to remain muted and that global demand for China’s exports is falling.

But February’s PMI data is the least reliable of all the monthly readings because of China’s Lunar New Year, which falls in either January or February and causes a Christmas-like shopping frenzy in China during the 15-day celebration—and therefore a big spike in factories’ orders beforehand. During the New Year, which fell in February this year, factories normally close for at least a week. So Chinese factories were shuttered for some of last month. HSBC’s Flash PMI gauge slowed to 50.4 in February compared to a final reading of 52.3 in January. The strong January reading might have occurred because manufacturers had a rush of orders from retailers stocking up for the vacation, with business then naturally pausing the following month.

Economists find the seasonal effect of the January and February PMI data tough to analyse. This is not only because the Lunar New Year always falls at different times, but also because as China’s economy has grown, retail sales during the holiday have increased for the past several years, creating an ever-larger distortion.

“You get this strong seasonality problem in the PMI data because of the Chinese New Year effect,” Le Xia, a Hong Kong-based senior economist at Spanish bank BBVA told Quartz. “So we are very cautious about interpreting this February data.”

That means it is probably best to wait for the March PMI to try and judge whether China’s frail economic recovery, which has largely been spurred by a credit boom, is continuing or reversing.