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WSJ : China PMI Falls to 50.2 in Latest Sign of Slowdown

Economic Data Muddled by Factories Shutting for Lunar New Year

BEIJING—A closely watched gauge of China's manufacturing activity dropped to an eight-month low in February, according to figures released Saturday, the latest sign of a slowdown in the country's factory sector.

The government's official purchasing managers index fell to 50.2 in February from 50.5 in January, where any number of more than 50 indicates expansion. The reading was more than the 50.1 median forecast of 11 economists polled earlier by The Wall Street Journal, and indicates growth at a marginal pace.

A preliminary reading of the HSBC manufacturing PMI, a competing index, fell to 48.3 in January, well into contractionary territory.

"This shows a further slowdown in the economy, but it's a modest slowdown," said Shuang Ding, an economist at Citigroup. "It hasn't reached the point where it would trigger a policy response from the government."

China's economic data are muddled in the first few weeks of the year due to the Lunar New Year holiday, when factories shut down and consumers withdraw extra cash from the banking system. The holiday moves around from year to year, confounding statisticians' attempts to compensate for it.

"The effects of the holiday can't be excluded," when interpreting the PMI, said a statement from the China Federation of Logistics and Purchasing, which compiles the index along with China's official statistical bureau. "Based on market demand and the production situation in some sectors, we expect that future economic growth will remain generally stable."

But the weaker number also points to doubts about the strength of China's economy at a time when other emerging markets are suffering from capital flight and concerns about China's domestic financial system are building. The central bank has been gradually moving to tighten credit conditions, amid fears of a mounting debt load that could destabilize the economy.

"The tightening of credit markets definitely suggests that [economic] growth could decelerate this quarter and next," said Mr. Ding.

The PMI subindex for new export orders fell to 48.2 from 49.3, casting doubt on the strength of global demand for Chinese goods. China's exports in January rose 10.6% from the same month of 2013, a strong performance that was nevertheless muddied by the holiday effect and persistent doubts about the quality of China's trade data.

South Korea's exports, which serve a similar market, rose a lackluster 1.6% year-over-year in February, according to data released Friday.

Still, the poor showing for export orders might be a result of one-off factors such as the exceptionally cold winter in the U.S., said Ting Lu, an economist at Bank of America Merrill Lynch. "I would expect the PMI to rebound in March," he said.

China's currency, the yuan or renminbi, unexpectedly fell almost 1% on Friday, the biggest one-day drop since the peg to the dollar was dropped in 2005. That would help the export industry if it was sustained, but most analysts said it was likely only a pause in a long-term upward trend.

Unlike other countries that have seen their currencies tumble this year, such as South Africa and Brazil, China runs a large trade surplus, contributing to upward pressure on the yuan.