China factory activity picks up, export orders recover

BEIJING Fri Sep 30, 2011 11:19pm EDT

An employee works on circuit boards at an electronic component factory in Hefei, Anhui province August 1, 2011. CREUTERS/Stringer

An employee works on circuit boards at an electronic component factory in Hefei, Anhui province August 1, 2011. C

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BEIJING (Reuters) - China's factory activity picked up in September for a second month in a row and export orders strengthened, offering some reassurance that the world's second-largest economy can weather the global economic turmoil.

The official purchasing managers' index showed inflation pressures eased slightly, but probably not enough for Beijing to relax in its battle against soaring prices.

China's PMI inched up to 51.2 from August's 50.9, largely in line with a median forecast of 51.3 in a Reuters poll.

The new export orders index rebounded to 50.9 from 48.3 in August, which was a 28-month low. The 50-point mark is the dividing line between expansion and contraction.

China is by no means immune to slowdowns in the United States and Europe, its two biggest export markets. However, strong domestic demand and solid Asian export growth have provided some insulation.

Still, investors have grown increasingly concerned that China's economy may slow more sharply than anticipated. Beijing has tried to orchestrate a modest cool-down to help curb inflation, but a deepening debt crisis in Europe threatens to trigger a recession there, which could trip up global growth.

Saturday's data suggested fears of a more pronounced China slowdown may be somewhat overblown. September's PMI reading was the highest since May. The index had steadily declined from March through July as growth in new orders slowed.

"September's PMI should provide some support to global investor confidence, if only at the margin," said Alistair Thornton, an economist at IHS Global Insight in Beijing.

"However, this does little to clarify policy stance, with authorities still eyeing the situation in Europe and the United States for their cue to loosen," he added in a note.

The People's Bank of China reaffirmed on Friday that it would keep monetary conditions tight in its effort to rein in stubborn inflation, adding that containing domestic price pressure remains its top priority.

The official PMI pointed to a slight ease in inflationary pressure, with the input price sub-index edging down to 56.6 last month from August's 57.2.

However, a separate survey by HSBC, released on Friday, showed the same sub-index climbed to a four-month high of 59.5 in September from 55.9 in August.

The official PMI, compiled by the China Federation of Logistics and Purchasing on behalf of the National Bureau of Statistics, provides a snapshot of business conditions in factories before official monthly output data.

"The small rise in September PMI indicates a rising likelihood that the downward trend in economic growth is stabilizing," said Zhang Liqun, a researcher with the Development Research Center, a think-tank under China's cabinet.

"But considering all factors, there is still high possibility the economy could continue to slow. Small firms are facing many difficulties right now," he added in a statement accompanying the data release.

The HSBC PMI painted a gloomier outlook of Chinese factory activity. That survey showed manufacturing shrank for a third successive month in September, with a headline reading of 49.9, unchanged from August but up from a preliminary reading of 49.4.

HSBC's report captures more small private firms which have been hit harder by domestic credit curbs and slack global demand. The official PMI includes more state-owned companies.

"China needs to increase its policy support for the small and medium-sized enterprises as soon as possible," Zhang said.

The sub-index for overall new orders picked up to 51.3 from previous month's 51.1, reversing a downward trend since March.

Although the official PMI sub-index for new export orders improved, it lagged behind the readings for the same month of the past few years, excluding the ultra-weak readings recorded in the midst of the global financial crisis.

"That means the year-on-year growth of China's exports will fall in the next two quarters under the weakening global demand," said Dong Xian'an, chief economist of Peking First Advisory.

(Reporting by Langi Chiang; Editing by Emily Kaiser)

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