China's PMI Finally Improved, so Why Are We Still Worried?

BEIJING (TheStreet) -- The first month-on-month improvement since last fall for China's Purchasing Managers' Index suggests the government has thus far safely controlled the country's economic slowdown.

But a risk of losing control hung in the air Tuesday after Beijing authorities posted a March PMI reading of 50.3, up from 50.2 in February. The monthly index had been falling since November.

One reason for worry was Beijing's official data clashed sharply with a similar report released Tuesday by the bank HSBC (HSBC), which posted a separate PMI reading of 48, down from 48.5 in February and the lowest in eight months. An index below 50 means business is shrinking.

HSBC's chief economist for Greater China, Hongbin Qu, said the bank's survey "confirmed the weakness of domestic demand conditions" and raised expectations the Chinese government might "fine-tune policy sooner rather than later to stabilize growth."

Some analysts have suggested "fine-tuning" might come in the form of government stimulus, but to date Beijing has shown little interest expanding public spending beyond existing transportation infrastructure and low-income housing projects. Debt linked to a 4 trillion yuan stimulus program after the 2008 global financial crisis still haunts local governments nationwide. 

That the central government is not afraid to let the economy cool was highlighted last week when Premier Li Keqiang promised in a speech a "steady and smooth... but not without risk" economy for the coming year. What Beijing wants most, Li said, is stability rather than fast growth.

Moreover, the Communist Party has been pushing since last year for more market-oriented policies. One example is a recent decision to let the state-run oil company Sinopec (SHI) sell some of its retail assets to private investors, perhaps starting this month.

Last week, the state-run investment bank China International Capital Corp. forecast a 2014 GDP growth rate of 7.3%, significantly short of the 7.5% goal set earlier this year by the government. Last year's GDP growth rate was 7.7%.

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