China factories eye stronger fourth quarter, external risks remain

BEIJING Thu Oct 25, 2012 5:23am EDT

A worker cleans the window of an apartment building at a residential area in central Beijing, October 24, 2012. REUTERS/Petar Kujundzic

A worker cleans the window of an apartment building at a residential area in central Beijing, October 24, 2012.

Credit: Reuters/Petar Kujundzic

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BEIJING (Reuters) - China's factory output should grow faster in the last three months of 2012 than in the third quarter, though the recovery remains clouded by uncertainty in export markets, the Ministry of Industry and Information Technology said on Thursday.

Month-on-month improvements in output growth, an apparent turnaround signaled by a private sector survey of purchasing managers and an uptick in preliminary power generation data were all indications of a burgeoning recovery, the ministry spokesman and chief engineer, Zhu Hongren, told a news conference.

"The industry sector performance has shown signs of stabilization and we can see an even clearer growing trend from the month-on-month figures in the third quarter," Zhu said.

"Therefore, we expect that industrial output growth in the fourth quarter would be faster than that in Q3, which will help the country to achieve its annual economic growth target of 7.5 percent," he added.

But a ministry statement issued before the news conference began was focused more on the risks of weak external demand, rising production costs, financing strains and squeezed profit margins across China's industrial complex.

"The stabilization trend of China's industrial sector is not yet solid and we are still facing many challenges and difficulties to realize stable growth," the ministry's earlier statement said.

"Although export growth rebounded in September, it is still very difficult to see a stable growth in exports of industrial products in future due to shrinking external demand," the statement said.

A festering debt crisis in China's biggest foreign market, the European Union, has dented demand for goods coming off assembly lines in the vast factory sector and ultimately weighed on the domestic economy.

Exports were worth 31 percent of GDP in 2011, according to the World Bank, and supported an estimated 200 million Chinese jobs.

The written statement echoes that from Commerce Ministry spokesman, Shen Danyang, who said last week that one month's solid trade data was not sufficient evidence of a recovery trend given complications in the external sector.

A jump in annual export growth in September to 9.9 percent, roughly twice the rate expected by investors, has led some analysts to conclude that recovery in the external sector is gathering momentum.

The downturn in China's main markets has been the main cause of the rapidly cooling growth in the export-sensitive economy since 2011's 9.2 percent expansion.

Analysts polled by Reuters expect to China's economic growth to slow to 7.7 percent for the full year in 2012 - a 13 year low.

RECOVERY SIGNS TENTATIVE

Tentative signs of recovery in China's vast factory sector though came on Wednesday in the HSBC China Flash Purchasing Managers Index (PMI) for October, which showed new orders at their highest in six months and output at a three month peak.

But while the headline PMI index rose to a three month high of 49.1, it was still below the 50-point mark that separates expanding from shrinking business activity.

In the world's second biggest economy where industrial output expanded at a 9.2 percent annual rate in September, it implies that while China's factories are growing, they are doing so more slowly than previously.

The PMI survey also found, however, that stocks of purchases were their strongest since July while stocks of finished goods were at their weakest since March, which implies an upturn in orders will be met by a rise in factory output.

China's annual industrial output growth was 10 percent in the first nine months of 2012, leaving it below the Ministry's 11 percent target for the year.

Premier Wen Jiabao said earlier this month that the economy is showing positive changes and the government is confident it can achieve its full-year economic growth target of 7.5 percent.

Beijing has been following a program of pro-growth fine tuning of economic policies for a year and analysts broadly expect that to remain in place when a new leadership line-up of the ruling Communist Party is unveiled at a Congress next month.

The fine tuning includes two interest rate cuts, three reductions in the portion of deposits banks must keep as reserves (RRR) - freeing an estimated 1.2 trillion yuan ($190 billion) for lending.

There were also approvals in September for infrastructure projects worth about $157 billion, although Beijing has not said explicitly where the money to fund them is coming from.

China's overall economic growth accelerated to 2.2 percent quarter-on-quarter in the third quarter from an upwardly revised 2.0 percent rate in the second quarter, data showed last week, further reinforcing views of some analysts that a recovery is beginning to take hold.

(Editing by Simon Cameron-Moore)

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