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China's official PMI seen hitting 8-month low, barely showing expansion

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SummaryA reading above 50 indicates expanding activity while one below that level points to a contraction.

China's factory activity likely expanded only slightly in February, a Reuters poll showed, dropping to an eight-month low that would indicate a modest slowdown is continuing.

China's official manufacturing purchasing managers' index (PMI) may slip to 50.1, down from January's 50.5, according to the median forecast of 12 economists in the poll.

A reading above 50 indicates expanding activity while one below that level points to a contraction.

If February's reading is below 50.5, it will be the third straight month of decline since November's 51.4. The last time the index was below 50 was in September 2012, when it was 49.8.

A preliminary survey released last week by HSBC and Markit Economics showed that the factory sector activity hit a seven-month low of 48.3, from 49.5 in January. The index for new orders dropped below 50, and employment reached its lowest point since the global financial crisis.

"Usually we observe if the HSBC PMI has seen such a big decline, then the official one will also see a similar downward trend, but not as bad," said Wei Yao, China economist at Societe Generale in Hong Kong.

The official PMI is weighted more towards bigger and state-owned enterprises and tends to paint a rosier picture than the HSBC/Markit private survey, which focuses more on smaller firms and those in the private sector.

"When the economy slows down, usually the private sector feels the squeeze first," Yao said.

Analysts cautioned against reading too much into this month's preliminary Markit/HSBC numbers, given the smaller-than-usual number of work days. The Lunar New Year festival, which began on Jan. 31 and covered early February, likely affected factory output as manufacturers shut for China's biggest annual holiday.

China's economic indicators have been mixed of late - weak investment and declining PMI readings have been countered by surprisingly buoyant exports and bank lending. This makes it hard to draw firm conclusions about the economy's direction.

The government has been trying to reduce the economy's dependence on exports and enhance the role of domestic consumption, but it is unclear how much growth it might be willing to sacrifice for its goal.

In 2013, China grew 7.7 percent, steady from the previous year and fractionally above market expectations of 7.6 percent, which would have been the slowest since 1999.

Economic growth targets for 2014 have yet to be made public. Government economists have said the official target could again be 7.5 percent, the same as the 2013 target.

The official

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