The operating environment of the manufacturing sector in the mainland has improved significantly to one of its best levels in 4 years, the latest survey by HSBC of managers of the sector showed.

The HSBC China Manufacturing purchasing manager index (PMI) rose to 57.0 in March, its third-highest level in the survey history since April 2004, the bank said in a report released yesterday.

The latest reading indicates that output growth in the mainland manufacturing sector accelerated in March compared with the previous month, supported by a near-record rise in new orders.

For the first quarter of this year, overall growth of the sector was the "most marked" since the start of the tracking in April 2004, the report notes.

"Another substantially high headline manufacturing PMI reading, combined with strong growth of exports, points to acceleration in industrial production and likely year-on-year GDP growth of over 11 percent in the first quarter," said Qu Hongbin, Chief Economist for China and Co-Head of Asian Economic Research at HSBC.

Managers generally attributed the accelerated output growth to robust client demand.

The level of new business continued to rise in March, increasing at the third-fastest rate in the PMI's history. New business growth has now been maintained for twelve months in succession.

The increase in new orders was due to greater demand from both external and domestic buyers, managers said.

Export sales rose at a near-record pace in March, largely as a result of ongoing economic recovery in a number of China's key trading partners.

Backlogs accumulated at a marked rate in March as manufacturers continued to find it increasingly difficult to complete both existing and new contracts.

Meanwhile, staffing levels increased at a solid rate that was the fastest in three months. Business expansion plans and higher output requirements were cited as having supported employment growth.

"With inflation pressures rapidly accumulating, this (the acceleration in industrial production) increases the risk of interest rate hikes in the coming months," Qu said.

In another development, investment bank Goldman Sachs ranked Hong Kong-listed mainland companies as its "New Top Trade" among various markets and sectors, citing their low valuations and the strong outlook for economic growth in the mainland.

The investment bank said it expects the Hang Seng China Enterprises Index (H-share index), which tracks the performance of HK-listed major mainland companies, to climb at least 20 percent this year, Bloomberg News reported Thursday.

"We sense that Chinese equities have fallen off investors' radar somewhat, positioning is light, and sentiment is, at best, skeptical, making us all the more keen to get involved," said Dominic Wilson, an economist at Goldman Sachs in New York.

The H-share index has dropped 10 percent from a 17-month high in November, compared with a 2.8 percent gain for the MSCI Emerging Markets Index, on concern that policy makers will curb bank lending and raise interest rates to slow growth.

China Daily

(HK Edition 04/02/2010 page2)