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China's diverging purchasing indices keep analysts guessing

A labourer welds a giant funnel that will be used in a coal-burning power plant in Huaibei, Anhui province, in this photo taken in March.


If you're feeling a little confused about China's economic outlook, you're in good company.

China's most recent purchasing managers index results seem to have a little something for both bulls and bears – namely, an HSBC flash index at 48.3, showing March was a fifth consecutive month of contraction, versus an official PMI which rose 2.1 points to 53.1, a one-year high.

At least part of the discrepancy lies with the methodology. HSBC's index tends to put more weight on small- to medium-sized private enterprises which are more heavily export- reliant, while the official index reflects more of the situation in larger state-owned enterprises, which are benefitting from stronger household spending.

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The differing trends, though, are anybody's guess.

"I can't figure it out. You could say that they used different methodology, different sample sets," said Patrick Chovanec, an economics professor at Beijing's Tsinghua University. "But there's usually one or two points difference, and now these seem to be heading away from each other, one is going down and one is going up. I don't know how to reconcile it."

At HSBC, creator of the flash PMI, analysts warned that official data may still be distorted by the Chinese New Year spring festival, which usually prompts a February slowdown followed by more activity in March.

"The conflicting signals from China were especially frustrating. The divergence between the official and HSBC's PMIs leaves investors scratching their heads," an HSBC research note urging more government easing measures read. "China is lagging the region. This divergence cannot endure forever, especially if the rest of the world is again shifting down. We clearly need China to turn."

What the numbers do suggest, though, is that China's efforts toward reforming its economy's heavy reliance on state-owned enterprise and state-driven investment have slid, which makes tentative government moves toward reforming the private financing sector all the more important.

"The divergence between private and state-owned firms is clearly of concern, as state-owned firms are less productive. In recent years, the government has leaned on state enterprises to drive the economy, pushing some smaller private firms out of the market," wrote Alaistair Chan at Moody's Analytics.

The proof will be in next month's numbers, when seasonal distortions are removed and firms have been generally back to business as usual. But in the meantime, the calls for further economic reform are competing with the immediate concern over a global economic slowdown and the risk of a hard landing in China.

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On Tuesday, at the Boao Forum for Asia in China's tropical Hainan island, People's Bank of China governor Zhou Xiaochuan signalled plans for some deregulation of overseas investments, a move that could help smaller enterprises thrive by giving them alternatives to state banks, where lending has been tightened.

But he warned that China would need to use a number of tools to ensure a soft economic landing while keeping inflation under control.

"We are still in the global financial crisis period, there are new elements that may bring the global economy back to recession," Mr. Zhou said.

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