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China manufacturing gains strength despite share gloom

(Agencies)
Updated: 2009-09-01 16:50

China's vast manufacturing sector kept up its steady recovery last month, ignoring the gloom engulfing the Shanghai stock market, a pair of surveys showed on Tuesday.

The two indexes, compiled from polls of executives charged with purchasing materials, rose to a 16-month high as companies continued to benefit from the stimulus imparted by a 4 trillion yuan ($585 billion) government spending program.

Markets took heart from the signs of continued recovery in the world's third-largest economy.

Related readings:  Chinese shares edge up after day-earlier plunge  PMI of manufacturing sector reaches 53.2% in June  PMI of manufacturing sector stood at 53.1% in May  Manufacturing hopes for the future

Chinese shares closed up 0.6 percent, feeding into gains elsewhere in Asia, while US crude oil futures clawed back above $70 per barrel after falling by 4 percent overnight on fears that China's growth was moderating.

"China's equity market has taken a battering in the last few weeks, but the economic data suggests that the recovery remains on track," said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

The purchasing managers' index (PMI) compiled by the China Federation of Logistics and Purchasing (CFLP) rose to a 16-month high in August of 54.0 from 53.3 in July as output, new orders, imports and employment all showed strength.

A separate PMI, compiled by British research firm Markit and published by HSBC, jumped to 55.1 from 52.8 in July. The improvement was also driven by output and new orders.

The indexes are designed to give a timely snapshot of business conditions. A reading above the watershed of 50 indicates that activity is expanding; one below 50 suggests contraction.

The official survey has now been above this boom-bust line for six months, and the HSBC PMI has been in positive territory for five months.

"The slight increase in August PMI's shows that China's economy is maintaining upward momentum," Zhang Liqun, an economist at the Development Research Centre, a think-tank under China's cabinet, said in a comment for the logistics federation.

Good, not great

The reading compared with a record low of 38.8 plumbed in November when the economy was slumping due to a collapse in external demand and a downturn in the domestic property market.

"The Chinese manufacturing sector is likely to see further improvements in the coming months, adding fuel to overall growth recovery," Qu Hongbin, chief China economist with HSBC in Hong Kong, said in a statement.

The stream of good -- though not spectacular -- economic news out of China lately has not prevented a fierce sell-off in Shanghai stocks.

The main Shanghai index has tumbled more than 23 percent from its 2009 peak on Aug 4 as investors fret that the central bank is ordering banks to slow new loan disbursements following a record lending spree in the first half.

But the index is still up nearly 50 percent so far this year.

A near 7 percent fall in Shanghai on Monday rubbed off on Wall Street, where the Standard and Poor's 500 Index dropped 0.81 percent, and oil fell below $70 a barrel as traders read the sell-off in Chinese shares as portending economic weakness.

But Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong, said Shanghai was an inappropriate barometer of global risk appetite because China's capital controls meant the market was largely closed to overseas investors.

"It bears little resemblance to on-the-ground reality in China. We're seeing an improvement in the PMI consistent with an economy still gaining momentum in August," Maguire said.

He said he expected the influence of the Shanghai market over global equities to fade: "It's a fundamental relationship that simply doesn't exist."

Eric Fishwick, chief Asian economist at brokers CLSA, said he expected the gain in the PMI to be interpreted positively by markets jittery about credit tightening.

"I suspect that actual economic growth will prove very resilient to Beijing's attempts to slow loan growth, and there is little evidence that policymakers see the pace of fixed asset investment growth as problematic per se," Fishwick said.

"I would, therefore, expect manufacturing indicators, including the purchasing managers indices, to remain well supported in coming months," he added.