Chinese manufacturing snaps out of slowdown

BEIJING Wed Sep 1, 2010 8:24am EDT

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BEIJING (Reuters) - China's manufacturing economy staged a moderate rebound in August after slowing for several months under the onslaught of government measures to rein in credit and deter property speculation.

Despite encouraging signs of stabilization in a pair of business surveys released on Wednesday, analysts cautioned that the robust domestic economy would have to battle the headwinds of soft external demand, especially from the United States.

"This reconfirms our long-held view that China is moderating rather than melting down," said Qu Hongbin, chief economist for China at HSBC.

He was commenting on a rise in the bank's purchasing managers' index (PMI) to a three-month high of 51.9 in August from 49.4 in July. A PMI produced by the China Federation of Logistics and Purchasing (CFLP) also rose, to 51.7 from 51.2.

Investors cheered the news. MSCI's index of Asia Pacific stocks outside Japan rose 1.9 percent .MIAPJ0000PUS, while metals prices got a lift in anticipation of stronger Chinese demand.

"After the run of weak data from the United States through August, the Chinese numbers were a breath of life for the start of the new month," a metals dealer in Perth said. <MET/L>

The increase in the official PMI was close to the median forecast of 51.8 in a Reuters poll.

A figure above 50 denotes expansion; a reading below 50 indicates that business has contracted from the month before.

Both gauges had been trending lower -- since January in the case of HSBC's and since April for the CLFP's. This had fanned concern that Beijing was overdoing its tightening and throttling an economy that has become a major driver of global growth.

But Zhang Liqun, a government researcher, said the official survey of 820 firms across China showed that market concerns of an abrupt slowdown were unfounded.

"The modest rise in August's PMI shows that there will not be a deep correction in the Chinese economy," Zhang said in a comment on behalf of the logistics federation, which compiles the index for the National Bureau of Statistics.

In a sign that Beijing may increase investment to ensure the recovery stays on track, the National Development and Reform Commission (NDRC) urged speedy implementation of the country's 4 trillion yuan ($585 billion) stimulus package that was announced nearly two years ago.

"We must accelerate the construction of projects as long as they are of sufficient quality, and put them in use as soon as possible," the NDRC, a powerful agency, said.

ORDERS, INVENTORIES BODE WELL

Both surveys showed a decline in the stocks of finished goods even as orders improved, an indication that manufacturers will have to ramp up production to meet demand.

"The new orders to finished goods inventory PMI has been a good indicator of turning points in the cycle over the past two years," Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said.

"It suggests the current correction began in the middle of the first quarter and was tentatively signaling stabilization even before today's sharp rise in the ratio," he said in a reaction to the official PMI.

Bank of America Merrill Lynch agreed that the inventory and orders data boded well for a recovery in output in coming months.

With the government mounting a big push to build public housing, the bank reaffirmed its full-year GDP growth forecast of 10.1 percent, up from 9.1 percent in 2009.

But it said weakening growth in the United States and Japan would act as a drag on the economy and could prompt Beijing to slow the pace of the yuan's rise.

According to HSBC's survey, new export orders fell outright in August for the third month in a row.

Brian Jackson with Royal Bank of Canada in Hong Kong said it was too soon to celebrate the signs of stabilization.

"We expect China will have a relatively moderate slowdown over the second half of 2010, but weaker external demand from the United States and Europe still represent a significant downside risk in coming months," he said in a note.

Several economists also expressed concern at a sharp rise in input prices in both surveys.

But He Yifeng, an economist with Hongyuan Securities in Beijing, said it was also evidence of stronger economic activity.

"As businesses see economic growth picking up, they will want to step up investment and this will increase demand for upstream products and push up prices of inputs such as iron ore," he said.

(Additional reporting by Langi Chiang; Editing by Kazunori Takada)

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