China's Manufacturing PMI Hits Its 14-Month High!

China's manufacturing activity is ticking higher, folks! Just yesterday the HSBC flash manufacturing PMI report came in at 50.9 in December, surprising expectations of only a 50.5 index reading. Remember that the report, compiled by information services provider Markit and printed by British banking giant HSBC, is generally considered as the earliest indicator for manufacturing activity in China.

What got the market players giddy was that the latest figure is not only above the 50.0 mark that indicates industry expansion, but is also the highest reading since October 2011 when the data printed at 51.0.

The report also came in at the heels of stronger-than-expected industrial production and retail sales numbers released early this week. Not surprisingly, analysts interpreted it as a sign that the Chinese economy might not be facing a hard landing after all.

Since China is Australia's largest trading partner, it's easy to see why AUD/USD jumped by 20 pips in the first hour after the release and finished the day 48 pips higher than its open price. Commodities like oil and copper also benefited from the report as both capped another positive week.



But before you buy China-related assets faster than you can say "dumpling," you should know that China hasn't escaped the scrutiny of the market junkies.

You see, strong manufacturing and retail sales activity might indicate robust domestic production and consumption, but in order for China to sustain its growth, it also needs protection against external threats.

China's trade numbers recently gave investors mini heart attacks when BOTH exports and imports hinted that weak overseas demand could pose threats to the country's economic recovery. It also didn't help that recent PMI reports from the euro zone and the lack of progress over the U.S. Fiscal Cliff are already weighing on risk appetite.

This is why the latest manufacturing numbers isn't likely to dent the People's Bank of China's (PBoC) plans to step up its stimulus programs. In fact, the central bank is more likely to watch for improvement in other economic indicators before it considers putting a lid on cutting interest rates and boosting its reserve requirements ratio (RRR).

While we wait for more Chinese data though, we should also watch economic reports from the euro zone and keep close tabs on the U.S. Fiscal Cliff developments as both issues could affect how well the Chinese economy can avoid a hard landing.