More policy easing measures expected from PBOC

"We believe more PBOC policy easing is still warranted at the current stage to support growth" - HSBC

China's Manufacturing Purchasing Managers' Index (PMI) rose to a four-month high of 50.1 in February, beating analysts' expectation of 49.5, according to the latest report published by HSBC/Markit.

"Today's data point to a marginal improvement in the Chinese manufacturing sector going into the Chinese New Year period in February. However, domestic economic activity is likely to remain sluggish, and external demand looks uncertain", said HSBC chief China economist Hongbin Qu in a statement accompanying the report.

However, analysts are not very optimistic about the recent data and its impact on the economy. China's economy grew at the slowest rate in 24 years in 2014 at 7.4 percent, plagued by falling investment, a sluggish property market, and industrial overcapacity. Economists expect the growth rate to further fall to 7 percent this year.

"The reliability of the data is questionable given the backdrop of irregular seasonality associated with Lunar New Year holidays and is unlikely to be influential on market thinking on the economy", said Commerzbank Corporates & Markets in a note.

In order to stimulate the economy, the People's Bank of China cut interest rates in November and reduced the reserve ratio requirement in February. Analysts expect more policy easing in the coming months from the PBOC in the form of more rate cuts and reserve ratio reductions.

"More policy easing measures, such as expansionary fiscal policy and monetary easing in the form of RRR or interest-rate cuts are still needed," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong.

China's yuan moved down against the dollar on Wednesday after the PBOC set a weaker midpoint at 6.1384 per dollar prior to market open, despite stronger-than-expected PMI data. The spot market opened at 6.2570 per dollar and was trading at 6.2589 near midday.

"The PBoC set the USD-CNY fix at 6.13840 up sharply on the pre-holiday fix of 6.1330. USD-CNY spot is trading at 6.2599, which is just below the upper band of 6.2612. We expect USD-CNY to remain elevated until end Q3 and resume a modest downward trend thereafter", said Commerzbank Corporates & Markets.