PMI recovery brings fresh hope

Robust pick-up in new orders augurs well for manufacturing sector

After witnessing a slowdown during the last two quarters, China's economy seems to have returned to positive terrain with its key manufacturing gauge rising to a 16-month high in August on the back of strong new orders.

According to official data, the gauge also gave enough proof that there has been a steady improvement in the overall economic conditions and the government measures have helped steer the world's second-largest economy out of its longest slowdown.

The manufacturing Purchasing Managers' Index, which reflects factory production activities, jumped to 51 in August from 50.3 in July, indicating the fastest expansion of the industry in 16 months, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing. A reading above 50 indicates activity in the sector is accelerating, while one below 50 points to a slowdown.

The increase was propelled by new orders, which jumped to 52.4 in August compared with 50.6 in July, the highest reading in more than a year.

New export orders rose to 50.2, up by 1.2 points, the first time since April that it reported a reading higher than 50, the threshold separating expansion from contraction.

"The PMI suggests that the economy is further stabilizing," says Zhang Liqun, an analyst with the Development Research Center of the State Council. "It shows the rebound in both domestic and external demand, and the resultant increase in upstream product prices," he says.

According to Zhang, the rebound also indicates positive market expectations and the stronger ability of enterprises to adapt to economic restructuring.

With all the sub-indices of the PMI showing steady growth during the past month - the first time this year - there are enough indications that China had tided over economic slowdown concerns, analysts say.

On Sunday, JPMorgan Chase & Co announced a revised forecast of the whole-year GDP growth to 7.6 percent from 7.4 percent. It predicted a rise of 7.6 percent in the third quarter and 7.5 percent in the fourth compared with a year earlier.

Late last month, Deutsche Bank AG also upgraded its estimates for third-quarter GDP growth to 7.7 percent from 7.5 percent, while that for the fourth quarter was raised to 7.8 percent from 7.7 percent.

China's growth slowed to 7.5 percent in the second quarter from 7.7 in the first, when the central government focused more on rebalancing the economic structure and addressing the problem of excess industrial production capacity.

Yang Xiaolong, chairman of Zhejiang Gete Clothes, a textile firm in Wenzhou, Zhejiang province, says that there has been a moderate pick-up in overseas orders since July.

"I expect export volumes to rebound further next year, as the ongoing recovery in the United States and European countries will lead to more orders for Chinese companies," Yang says.

However, Yang expects the overall recovery to be slow, as this year's export peak season is already over.

Zhu Haibin, China chief economist of JPMorgan, says that growth momentum in the global economy is likely to pick up in the second half, based on the accelerated rebound in the US, Germany and France in the second quarter.

In addition, the government's policy fine-tuning since July, as well as the stable growth of the infrastructure and real estate sectors, will help stabilize growth and improve market sentiment.

The fast growth in credit earlier this year will also have an effect in the second half, he says.

Liu Ligang, chief economist in China with the ANZ Group, says, "China's overall economic growth reflects a positive situation, along with the accelerated implementation of fiscal plans."

"This year, about 58 percent of the fiscal budget will be used in the second half, and the government has planned some extra investment spending that can provide about 200 billion yuan, or 0.8 percent of the whole-year GDP," Liu says.

Another sign of stable growth is that the financial market has shown moderate fluctuation, although liquidity remains tight, he says.

According to official data, the PMI in August for large enterprises increased to 51.8 from 50.8 in July, staying above 50 for the 12th consecutive month. But that for small companies fell to 49.2 from 49.4.

Zhao Qinghe, a senior economist with the statistics bureau, says that the figures show that small manufacturing businesses still face challenges, and hence need more policy support from the government.

Data from HSBC Holdings, which released its August PMI on Sept 2, show that August PMI rose to 50.1 from an 11-month low of 47.7 in July.

The numbers indicate that the manufacturing industry has started to stabilize on the back of a modest rebound in new orders and output, the bank said.

Qu Hongbin, China chief economist of HSBC, says that the "initial filtering through of recent stimulus measures and the restocking activities of companies" fueled the recovery.

"We expect some upside surprises to China's growth in the coming months," Qu says.

The report from HSBC also predicted that the modest uptrend in production will continue in August, with year-on-year industrial production growth slated to be around 10 percent compared with 9.7 percent in July.

However, the numbers still indicate weakness in new export orders, which means that the growth will continue to depend on the ongoing turnaround in domestic demand, HSBC said.

In recent days, several financial institutions have raised their full year GDP growth forecasts for China, due to the recovering industrial production and investment.

China International Capital Co Ltd upgraded its full-year GDP estimates to 7.5 percent from 7.4 percent, and that for the third quarter to 7.6 percent.

JPMorgan Chase & Co said GDP growth might be around 7.6 percent by the end of the year, compared with 7.4 percent earlier.

Economists are also pinning hopes on the Third Plenum of the 18th Communist Party of China Central Committee that will be chaired by General Secretary Xi Jinping in November. Expectations are that the plenum is likely to sign off on an important economic reform package that will strengthen the economic growth outlook both in the short and long term.

"Government and fiscal reforms are likely to be at the core of the package," says Stephen Green, chief economist for China with Standard Chartered.

"We think that the implementation of reforms in 2014 and 2015 will significantly improve China economic sentiment," Green says.

The plenum is also likely to work out principles for reorienting government functions, providing sustainable sources of local fiscal resources, creating disciplined budgets that ensure money is well spent, and sorting out local government debt, the Standard Chartered economist said.

Wang Tao, chief economist in China with UBS AG, says that the economic indicators in August show that, "China's economic growth has started to recover".

"We expect both export and domestic demand to have improved, property construction to have remained in solid growth territory, and industrial production to have grown by almost 10 percent."

She says that the government's macro economic policy stance is likely to remain "largely unchanged" in the next few months, "as the government finalizes the reform package to be unveiled in the upcoming third plenary meeting in November".

UBS AG has predicted a GDP growth of 7.5 percent for both the third quarter and the whole year, adding that the GDP may have more upside, particularly if the export recovery holds up. Meanwhile, the consumer price index, a major gauge of inflation, is likely to remain unchanged at 2.6 percent.

chenjia1@chinadaily.com.cn