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China official PMI hits 16-month high in August

An employee works inside a silk factory in Neijiang, Sichuan province, July 3, 2013. REUTERS/China Daily
An employee works inside a silk factory in Neijiang, Sichuan province, July 3, 2013. REUTERS/China Daily

By Aileen Wang and Jonathan Standing

BEIJING (Reuters) - China's factory activity expanded at the fastest pace in more than a year in August with a jump in new orders, official data showed on Sunday, raising hopes that a rapid economic slowdown in the world's second-largest economy may have been arrested.

The purchasing managers' index (PMI) figure, published by the National Bureau of Statistics, rose to 51.0 in August from 50.3 in July, the highest level since last April and ahead of market expectations of 50.6 in a Reuters poll.

A reading above 50 indicates expanding activity, while a reading below 50 points to a contraction.

Beijing has stepped up efforts to prevent a sharp economic slowdown by quickening railway investment and public housing construction and introducing a series of measures to help smaller companies, which could sustain the revival of internal demand in the coming months.

"We are seeing clearer signs of economic conditions improving," said Haibin Zhu, chief China economist at JP Morgan in Hong Kong.

"One of the reasons is the lagging effect of credit growth earlier in the year, while the second is the recent shift in the policy stance and more concrete policy announcement."

As one of the first leading indicators gauging economic momentum, the improved reading could bode well for other August data, further confirming a stabilizing trend in the economy.

The official survey showed an across-the-board recovery in all sub-indices, ranging from new orders and quantity of purchases to input prices and employment, pointing to a positive picture for the vast factory sector.

"The PMI figure showed evident recovery in August, suggesting the economy is further stabilizing," Zhang Liqun, an economist at the Development Research Centre, a top government think tank in Beijing, said in a statement accompanying the PMI.

"The improvement in all sub-indices also showed market expectations are turning better and companies are adapting to the changing business environment," he added.

The sub-index measuring new orders rose to 52.4 in August from 50.6 in July, indicating stronger demand for Chinese goods.

Export orders returned to expansionary territory, rising to 50.2 from 49.0 in July, suggesting external demand is also up.

SMALL FIRMS ALSO PICKING UP

A separate PMI survey sponsored by HSBC, which focuses more on small-and medium-sized firms in the private sector, is scheduled to be published on Monday.

Its preliminary August reading, published last week, rose to 50.1, the highest level in four months, mainly due to a rebound in new orders.

Together with Sunday's official data and its focus on larger state-owned firms, the two surveys should show a broad-based stabilization in manufacturing.

Chinese officials have been optimistic about the growth outlook, saying there are clear signs of stabilization emerging from the economy and that the annual GDP target of 7.5 percent is achievable.

Vice Finance Minister Zhu Guangyao said on Tuesday there was no need for government stimulus and that growth can instead be supported through structural adjustments.

The commerce ministry has also said China's trade flows steadied in early August, with global demand improving and measures to help exporters kicking in.

JP Morgan's Zhu said the thrust of Beijing's recent measures is to stabilize the economy to create a platform for reform.

He said the government has been talking about specific policy measures, such as railway investment, which has given some clarity.

Despite an uptick in manufacturing activity, analysts cautioned that a strong rebound in the economy appears unlikely because most Chinese firms still face relatively high financing costs, in part due to Beijing's campaign to curb shadow banking.

An uncertain export environment and a strong yuan currency are also risk factors.

China's economy has slowed for nine out of the past 10 quarters, with GDP growth dipping to 7.5 percent in the second quarter from 7.7 percent in the previous three months.

Beijing has said it is willing to tolerate slower growth as it pushes reforms designed to quit an economic model which has an over-reliance on debt-financed construction and exports and embrace one driven by domestic consumption.

(Editing by Paul Tait)

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