UPDATE 2-Upbeat China Aug flash HSBC PMI points to stabilising growth
* Aug HSBC flash PMI rises to 50.1 from 47.7 in July
* Aug new orders sub-index hits four-month high of 50.5
* Upbeat PMI points to steadying growth in Q3
* Survey helps lift Asian shares off lows, boosts copper
By Kevin Yao
BEIJING, Aug 22 (Reuters) - Activity in China's vast manufacturing sector hit a four-month high in August as new orders rebounded, a preliminary private survey showed on Thursday, reinforcing signs of stabilisation in the world's second-largest economy.
The Flash HSBC Purchasing Managers' Index rose to 50.1 from July's final reading of 47.7, which was the weakest in 11 months.
But it barely surpassed the watershed 50 line which demarcates expansion of activities from contraction, indicating that a sharp recovery is unlikely.
Risks range from continued weakness in exports to persistent overcapacity in key industries, which could saddle banks with more bad loans. And China's leaders are walking a fine line between tolerating slower growth and pushing through reforms needed to rebalance the economy to a growth model that is more reliant on consumption than investment and easy credit.
The government has announced a series of targeted measures to support the slowing economy, including scrapping taxes for small firms, offering more help for ailing exporters and boosting investment in urban infrastructure and railways.
But leaders have refrained from massive stimulus like that during the 2008/09 global financial crisis, which left a legacy of inflationary pressures and bloated local government debt.
The flash PMI "confirms that the economy has stabilised in the short term and downside risks for H2 have declined," said Zhiwei Zhang, China economist at Nomura in Hong Kong.
A sub-index measuring new orders rose to a four-month high of 50.5 in August from 46.6 in July. But the sub-index on new export orders edged lower in a reminder of weak global demand.
The employment sub-index of the flash PMI also picked up in August, but still hovered below the 50 watershed line.
"This is mainly driven by the initial filtering-through of recent fine-tuning measures and companies' restocking activities, despite the continuous external weakness," said Hongbin Qu, chief China economist at HSBC.
"We expect further filtering-through, which is likely to deliver some upside surprises to China's growth in the coming months."
The flash HSBC PMI, compiled by Markit Economics Research, is the earliest available indicator of monthly activity in the Chinese economy, and tends to focus more on small to mid-sized firms in the private sector.
The Australian dollar jumped and Asian shares pared early losses after the PMI report but investors remained wary of negative fallout for Asia if the U.S. central bank begins to taper back its massive stimulus programme as early as next month. Copper rose and crude oil prices bounced off early lows.
NO QUICK RECOVERY IN SIGHT
Analysts in a Reuters poll forecast annual GDP growth of 7.4 percent in the third quarter and the full-year growth of 7.5 percent, in line with the official target. [ID: nL4N0FO0SP]
But Zhang at Nomura said he saw upside risks to his 7.4 percent GDP forecast for the third quarter as growth may pick up from the 7.5 percent pace in the second quarter.
"Nonetheless we believe a strong H2 recovery to above 8 percent is unlikely, as rising interest rates will pressure investment. We still expect growth to slow to 6.9 percent in 2014."
Fan Jianping, chief economist at the State Information Centre, a top government think-tank, said annual economic growth may hover around 7.5 percent in the third and fourth quarters of 2013.
"As long as China's growth rate remains above 7 percent, there will be no crisis. Double-digit growth is not in line with China's new reality," he told reporters on Wednesday.
Like some of its emerging market neighbours, China saw capital outflows for the second consecutive month in July, suggesting its sluggish economy is still deterring investors. But the pace at which money is leaving the country appears to be slowing and its markets have not been as volatile as in India or Southeast Asia.
The final HSBC PMI for August is due to be published on Sept. 2, a day after the release of an official government survey. The official PMI, which focuses on big and state-owned firms, has been generally rosier than the private survey, which targets small and private companies.
Upbeat data for July ranging from factory output and exports to retail sales has raised hopes that China's economy may be stabilising after slumping for more than two years.
Chinese leaders, while making clear they will accept some economic slowdown as they push through reforms, have expressed confidence of meeting their 7.5 percent growth target this year - which would be China's slowest growth in 23 years.
Radical reforms, such as full interest rate liberalisation, appear to off the table for now although they may be tackled in October, when the Communist Party holds a key meeting that will set its economic agenda for the next decade.
Until then authorities are expected to reach for low-hanging fruit: uncontroversial reforms that could have only modest impact on growth.
One case in point came in July, when the central bank scrapped the floor on bank lending rates, in a long-awaited reform that signalled determination to carry out market-oriented reforms. But the central bank left a ceiling on deposit rates unchanged, avoiding for now what many economists see as the most important step Beijing needs to take to free up interest rates.
For sure, Beijing will not rush into full yuan convertibility - a part of its push to make it a global currency - by dismantling capital controls at a time when volatile capital flows in emerging markets are raising concerns about economic stability.
Annual economic growth slowed to 7.5 percent in the April-June period from the 7.7 pct in the previous three months - the ninth quarter of slowdown in the past 10 quarters.
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