China's HSBC flash (preliminary) manufacturing purchasing managers' index (PMI) fell to a seven-month low of 48.3 in February. This was significantly worse than the 49.5 reading expected by economists.
Any reading below 50 signals contraction in China's manufacturing sector.
Markets around the world started selling after the report came out.
However, economists agree that we shouldn't jump to any conclusions based on this one report.
"Surely this flash PMI has quite big market impact and markets have already been hit today," said Bank of America Merrill Lynch's Ting Lu. "However, our suggestion is still to downplay it due to the poor quality of this HSBC flash PMI in the year beginning. The survey period of the HSBC flash PMI was 12-18 Feb, but the first six days in February are national holidays and many SMEs, which could be the majority of the HSBC PMI sample, were not open until mid-Feb, so the quality of this flash PMI could be quite low."
"Also note that PMI data are heavily seasonally adjusted, but the seasonal adjustment is quite inaccurate due to the different timing of Chinese New Year holidays and short record (since year 2005)," added Lu. "Actually the HSBC PMI did a poor job in predicting turning points of the Chinese economy in the past two years."
The HSBC's PMI is computed using monthly replies to questionnaires sent to purchasing executives.
"The sample period is very short, covering only seven days (12-18 February) according to the index's compiler, Markit, with a response rate of approximately 85%-90% our of a total sample of about 420 manufacturers," said Barclays' Jian Chang and Jerry Peng, who also acknowledged many of Lu's criticisms.
Unfortunately, market participants already appear to be trading on the news.
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