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HSBC China PMI hits 7-month high for Oct

Economists say growth momentum will favour reforms

MANUFACTURING activity in China has risen to a seven-month high this month, led by new orders, says a preliminary reading by investment bank HSBC.

The flash HSBC Markit PMI released yesterday, a week ahead of the month's final reading, was 50.9, above market expectations.

A reading above 50 indicates growth, and anything below that, a contraction.

HSBC economist Qu Hongbin said: "China's growth recovery is becoming consolidated in the fourth quarter, following the bottoming out in the third.

"This momentum is likely to continue in the coming months, creating favourable conditions for speeding up structural reforms."

The HSBC Markit PMI tracks manufacturing activity in China's factories and workshops and is a closely-watched gauge of the health of the economy.

A breakdown of the PMI or purchasing managers index showed most sub-indices over-performing. Output rose to a six-month high of 51 from 50.2; new orders were up 0.8 point to 51.6, a seven-month high; purchases of inputs climbed above 50 for the first time in nine months; and employment increased to 49.9 from 48.8.

However, the two price indices - input and output prices - both retreated from the final readings in September, pointing to a slower improvement in the producer price index ahead.

Earlier this week, official data showed gross domestic product reversing a downward trend, growing 7.8 per cent on the back of government support for certain key sectors of the economy.

However, many analysts say the data points to a fragile recovery. They expect growth to bottom out as soon as the fourth quarter, with China's new leadership yet to tackle the country's mounting debt and steer the economy towards key reforms.

Recent moves by the central and local governments show that with growth now stabilising, Beijing is more at ease about implementing reforms, which will weigh down on growth in the medium term.

Major cities are expected to tighten the property sector in the coming months in an ongoing war against skyrocketing prices.

On a more macro level, the People's Bank of China has withdrawn nearly 100 billion yuan (S$20.3 billion) from the interbank market in the past two weeks.

Mark Williams, an economist with United Kingdom-based research firm Capital Economics, said it appears increasingly likely that growth has peaked, but policymakers should not be unduly concerned, given that the labour market remains strong.

"The bigger issue is still that credit is expanding at an unsustainable rate. We expect efforts to rein in credit to result in a steady slowdown in the economy over the next few quarters."

Yao Wei, an economist with Societe Generale in Hong Kong, said: "The leadership still intends to deleverage the economy, which is the main reason behind our call that the secular deceleration trend is far from over."

The flash PMI is based on 85 to 90 per cent of the total responses to the survey sent out to private-sector companies in the sector, and is designed to give an indication of what the final PMI data for the month will be. Last month's final HSBC PMI figures delivered a shock to the markets, coming in at a full point below the flash reading for September.

Mr Yao said: "Given the big difference between the flash and the final last month, it is somewhat difficult to judge the magnitude of the improvement, although the levels of these PMI readings suggest that the growth momentum of smaller manufacturing firms, at least, held up in October."