GO
Loading...

China factory sector expands for first time in 6 months

China's manufacturing activity expanded for the first time in six months in June, a private survey showed on Monday, adding to evidence the world's second-biggest economy is stabilizing.

A flash reading of the HSBC/Markit purchasing managers' index (PMI) rose to 50.8 versus the 49.4 final reading in May, above the 50-level that demarcates expansion from contraction.

The cheer in markets was immediate: Australian dollar rose a quarter of a cent against the greenback, while Asian stocks widened their gains with Australia's benchmark index leading gains by 0.7 percent.

Read MoreChina's economy is at a 'tipping point'

The survey showed an across-the-board improvement in China's vast factory sector, with most of the 11 sub-indices accelerating from previous months.

The sub-index for new orders for one, a proxy to measure domestic and foreign demand, rose to 51.8 at the fastest pace in 15 months.

Stringer | AFP | Getty Images

"I think the authorities' stealth easing campaign is starting to bear some fruit, said Richard Iley, chief economist of Asia at BNP Paribas.

"They've pushed down the normal exchange rate which is a significant break in trend and they've also been sitting on money market yields, lowering bank costs of funding. So in the short term, the medicine is working a bit and I think this is an economy that will bounce over the summer," he added.

In recent months, Chinese authorities have rolled out a series of modest economic measures, referred to as a "mini stimulus," to support growth in the world's second-largest economy, which included a cut in the level of reserves for banks that lend to the farming sector and small-and-medium-sized firms.

Read MoreChina's fine-tuning still has big impact

But recovery has been patchy, sparking concerns if the economy can hit the 7.5 percent growth target Beijing has set for this year.

Premier Li Keqiang said last week that China's economy would not suffer a hard landing and would continue to grow at a medium to high pace in the long term without strong stimulus.

According to Richard Yetsenga, head of global markets research at ANZ, until China gets more aggressive on stimulus, the recovery in the manufacturing sector will be mild.

"It's hard to see a significant rebound because you haven't had anything significant in policies. You've had some tweaks at various points but similarly they do seem want to stabilize growth [which] seems to be the policy objective [of Beijing] now," said Yetsenga.

Others point to bigger risks in the economy, particularly the property sector. Data last week showed China's new home prices rising 5.6 percent in May from a year earlier, its slowest pace this year.

"The HSBC flash PMI number today, although it's better than expected, may not be sustainable (because) without a recovery in the property market, any rebound in China will be somewhat questionable, particularly as the country continues to move its economy away from infrastructure to consumption growth," said Jiong Shao, chief China strategist at Macquarie.

Read MoreChina's May home prices rose at slowest pace this year

"(China's property sector) makes up a large share of GDP (gross domestic product), about 12 percent. In the U.S., it's under 6 percent so in China the sector is really big and it drives a large part of growth, both directly and indirectly. If it really goes down, which it is - prices are down, new home sales are down quite sharply," said Dariusz Kowalczyk, senior economist of Asia ex-Japan at Credit Agricole.

"The tipping point now is between manufacturing taking us higher and real estate taking us lower. At this point, there is very little visibility in terms of who will win," he added.

—By CNBC's Li Anne Wong. Follow her on Twitter @LiAnneCNBC.

Contact Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More