Before addressing China's future, let's get some facts straight. The flash estimate that's roiled markets is published one week before final HSBC Purchasing Managers' Index (PMI) data, providing a snapshot of the manufacturing sector conditions in China. According to data provider Markit, which compiles for HSBC a survey of more than 420 purchasing executives, the estimate is typically based on 85-90 percent of the total PMI surveys collected between the 12th and 20th of each month. The mean absolute differences between the flash and final PMI are negligible, with the exception of the Great Recession, when economic and financial conditions were deteriorating rapidly (see chart below).

Flash versus Final China PMI

March's flash HSBC China manufacturing PMI slowed to a four-month low of 48.1, down from a final reading of 49.6 for February, the fifth consecutive month of shrinkage for China's manufacturing output. The key drag came from a significant drop in total new orders, which was even lower than new export orders, implying that domestic demand in China was hit worse than exports orders. More worrisome, the employment sub-index fell sharply to the lowest level since March 2009, suggesting slowing manufacturing activity is taking a toll on the labor market.

What do the numbers mean?
We see China's growth remaining on track for a soft landing, not a hard one, despite the disppointingly modest improvement in manufacturing production after the Chinese New Year.

Current PMI readings remain in line with a GDP growth rate of around 8 percent for the first quarter. While the data suggest the economy is struggling for traction, we don't see a high probability of a hard landing in China, despite there being no meaningful rebound of domestic demand in sight. The People's Bank of China, after delivering this year's first required reserve ratio cut, is likely to step up interest-rate easing as inflation pressures continue to abate.

Improving global growth hopes, led by better than expected U.S. economic data, among them an improvement in employment figures, along with an easing of Eurozone tensions, will help the Chinese economy to navigate choppy waters. Additionally, we believe Chinese consumers will still support growth in domestic demand, offsetting much of the weakness in manufacturing.