China gains steam in manufacturing

Production rises for a third straight month, and ahead of forecasts, but analysts say monetary policy needs to be loosened further to sustain growth

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.

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.

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