Gradual China recovery seen as Oct PMI jumps

Beijing

CHINA'S manufacturing sector expanded in October, two surveys showed yesterday, though mixed readings from key indicators such as export orders point to what will at best be a gradual economic recovery.

The official purchasing managers' index (PMI) - which measures manufacturing activity in Chinese factories and is regarded as a barometer of economic health - hit an 18-month peak of 51.4, a touch higher than the 51.1 in September and the 51.2 forecast in a Reuters poll. A separate final PMI index published by HSBC and Markit rose to a seven-month high of 50.9.

While both surveys breached the 50-mark separating growth from contraction, they gave differing readings on new orders and new export orders - falling in the official PMI and rising in the HSBC/Markit PMI. The official PMI is weighted more towards bigger and state-owned enterprises, while the HSBC/Markit survey focuses more on smaller and private-sector firms.

Both sets of data point to a stabilisation of the world's second-largest economy.

"This upbeat headline official PMI supports our view that steady growth can be sustained in the range between 7.5 per cent and 8 per cent. On the ground, we have reported that some new infrastructure projects have started. Housing sector activities are robust," said Dong Tao, China economist at Credit Suisse. Agreeing, Hongbin Qu, HSBC's chief economist for China, reckoned that the economy was on track for a gradual recovery.

Another independent survey published yesterday also showed strong demand in the property sector, with average prices of new homes in 100 major Chinese cities jumping 10.7 per cent year on year.

But analysts question the strength and sustainability of the recovery, which they contend has been based on an investment and export-dependent growth model. This has fuelled double-digit GDP increases over the past decade but also brought about economic distortions and high levels of debt.

Beijing now wants to encourage domestic consumption, and has made it clear that it will accept lower growth rates as the economy undergoes transformation.

"The foundation for a recovery is not yet solid," said Zhang Liqun, an economist at the Cabinet think tank Development Research Center. Noting that order, inventory and purchasing price sub-indices declined, he said this suggested that "companies are still rather cautions about the future outlook".

The economy grew 7.8 per cent year on year in Q3, and economists expect growth to moderate to 7.5 per cent in last quarter. This would still be enough to reach the government's target of 7.5 per cent for 2013.

According to the official PMI, strong output was the main driver, rising to 54.4 from 52.9. This was offset by weakness in new orders and new export orders, which both dipped 0.3 points to 52.5 and 50.4 respectively.

The survey also showed that smaller firms continued to underperform larger ones, with new orders in large enterprises reaching 53.8, while small businesses suffered a contraction at 48.8.

Said Credit Suisse's Mr Dong: "This is consistent with our view that while the economy is stabilising, this is not a very strong rebound. The stabilisation is still largely relying on infrastructure investment and the housing market. The generic investment from the private sector still seems to be missing. Structural reforms are needed to re-engage private investment and to push the economy back on the right track."

The final HSBC/Markit PMI was unchanged from a preliminary flash estimate released last week, and showed a uptick in both new orders and new export orders.

The Chinese Communist Party is set to meet next week for its third plenary meeting, where major economic reforms are expected to be unveiled.