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China's October PMIs hit two-year high

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China's manufacturing activity expanded further in October, as the world's second largest economy continued to stabilise.

Beijing

CHINA'S manufacturing activity expanded further in October, as the world's second largest economy continued to stabilise.

The official purchasing managers' index (PMI) came in at 51.2 for October - the highest point in more than two years; it was also well above analysts' expectations. The index stood at 50.4 the previous month. A figure above 50 signals expanding activity, and anything below that indicates a contraction. NBS analyst Zhao Qinghe said in a statement when the data was released: "Production and market demand is picking up again, accelerating expansion."

The Caixin index, a private PMI survey more focused on smaller private companies and which often trails the official figure, was also up, climbing by more than one point month on month to 51.2. This shows that recent efforts by the government to steer credit away from state-owned firms to the more efficient private sector has paid off. The official index for non-manufacturing activity was also up, to 54.0 in October from 53.7 in September. The monthly PMIs are the latest sign that China's economy is rebounding, after having grown at its slowest in 25 years last year.

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Julian Evans-Pritchard, economist with Capital Economics, said: "The better-than-expected PMI readings, the strongest in over two years, are a welcome sign that the recent cyclical recovery continued to gain momentum going into the fourth quarter."

To avoid a hard landing, the government has, in the past 18 months, implemented a string of measures, including lowering the reserve ratio rates for banks and reducing the cost of credit. As a result, economic activity has stabilised since August on the back of rising commodity prices, including those for steel and coal; the construction industry has made a strong pickup.

Broken down, the PMIs last month point to confidence in both state and private firms, supported by a rebound of domestic demand. The output and new-orders sub-indices are up, along with that for employment.

Factory output accelerated last month, with the sub-index rising to 53.3 from 52.8. Total new orders also performed well, rising to 52.8 from September's 50.9.

Mr Evans-Pritchard said: "Overall, today's data is unambiguously upbeat and consistent with broader evidence that the economy is currently in the midst of a cyclical recovery." Nonetheless, analysts warn that the recent credit binge may be coming to an end, and that downward pressures could return. Both the International Monetary Fund (IMF) and Bank of Settlements have warned that debt levels could lead to a banking crisis in the coming years.

The government has already begun to reign in the property markets in first and several second-tier cities; it is also faced with the task of reforming its debt-ridden state-owned enterprises - even while ensuring stable growth and a high level of employment.

While some over-capacity has been shed in the coal and steel sectors, rising prices of commodities have kept steel furnaces alight, with most provinces far behind on their targets. Caixin analyst Zhong Zhengsheng said after the release of the PMI figures: "The economy seems to be stabilising for the moment, owing primarily to policies implemented to sustain growth. "Supportive policies must be continued, or industrial output may be dragged down by a slowdown in investment."

China's debt growth is outpacing the growth of the gross domestic product (GDP); debt has hit more than 250 per cent of GDP. Local markets responded positively to the PMI data. Both the Hong Kong and Shanghai markets closed up. The Hang Seng Index rallied 0.93 per cent or 212.53 points to end at 23,147.07. The benchmark Shanghai Composite Index rose 0.71 per cent on Tuesday to close at 3,122.44.

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