China's Feb Official PMI Edges Towards Recovery

China's official manufacturing index rose smartly in February, gaining for the third month in a row and suggesting the country could be on the brink of a recovery despite a slump in global demand.

Elizabeth Dalziel / AP

The official purchasing managers' index (PMI), released on Wednesday, rose to 49.0 from 45.3 in January, the China Federation of Logistics and Purchasing (CFLP) said.

It was the fifth straight month that the index was below the no-change line of 50 that marks the difference between expansion and contraction. But the index is now well clear of a record low of 38.8 plumbed in November.

"China's economy is possibly on the road to a sustainable recovery," said Zhang Liqun, a government economist who comments on the survey for the logistics federation. "Policies are beginning to show their effectiveness, supporting quite fast economic growth," he said.

The government has ramped up investment, pledging 4 trillion yuan ($585 billion) in stimulus spending, to step into the breach left by a collapse in Chinese exports and a downturn in the domestic property sector.

Optimism that the Chinese economy could be bouncing back has been fuelled by a surge in lending, with new local currency loans hitting a record 1.6 trillion yuan ($233.9 billion) in January.

Local media reports on Wednesday said that banks lent closer to 1 trillion yuan in February, a sum that is still extremely high by historical standards.

But the explosion in credit has been greeted with some skepticism by analysts, who say that part of the lending has been channeled into risky stock investment rather than production.

The jump in the PMI also drew a skeptical eye.

"There's still good reason for caution. The manufacturing sector overshot last year in cutting inventories, and a bounce was inevitable," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong.

"Factories will struggle to sustain the increase. I think we'll bounce along at low rates of activity for the next six months or so," he said.

The official PMI jumped well ahead of a similar manufacturing survey produced for brokerage CLSA, whose index registered 45.1 in February, also up on the previous month but more firmly in contractionary territory.

The official survey is generally regarded as more of a leading indicator than the CLSA survey, which is seen as a better reflection of current manufacturing conditions.

Every sub-index in the official PMI rose in February. Output and new orders climbed to 51.2 and 50.4, respectively, both returning to mild growth after shrinking for four months.

New export orders rose to 43.4 -- still in negative territory but a 9.7 point leap from January.

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"Indicators clearly show that the Chinese economy is trending to a recovery from its low point," Zhang, the government economist, said.

Premier Wen Jiabao said on Saturday that stimulus spending had started to nudge the economy in the right direction but that the global financial crisis could still take a turn for the worse.

With the annual session of parliament opening on Thursday, a parade of officials, from central bankers to the finance minister, have said that China will be able to achieve its target of 8 percent growth this year, despite global headwinds.

Cutting against the grain of good news, though, China's purchasing managers' index for non-manufacturing sectors fell to 41.9 in February from 51.0 in January, the CFLP said.

The non-manufacturing sector includes retailing, airlines, transportation, construction and catering.

Copyright 2009 Reuters. Click for restrictions.