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Is China’s Rebound Going to Be Better Than Expected?

While widely watched economic indicators on Friday showed the world's second largest economy was on a path to recovery, a closer look at some pointers like electricity consumption and retail sales raises hopes that the rebound in China's economy may surpass expectations.

Steven Puetzer | Getty Images

October retail sales rose 14.5 percent last month from a year ago, compared to forecasts of 14 percent. Industrial output growth quickened to 9.6 percent year on year, beating market expectations for a 9.4 percent rise.

China's fixed asset investment also rose 20.7 percent in the first 10 months from a year earlier, higher than expectations for a rise of 20.6 percent.

Haibin Zhu, chief China economist at JPMorgan said the latest round of data point to further "upside surprises" out of the mainland economy going forward, adding that growth in the fourth quarter may outpace his current expectations of 7.4 percent.

"Overall, this data shows a broad-based improvement. The recovery is gaining traction," Zhu said.

Less-cited indicators such as electricity consumption – seen as a proxy for growth - also mounted a significant recovery last month, rising 6.4 percent from a year earlier, its best performance since March.

"Electricity consumption at over 6 percent suggests on-the-ground economic momentum underway and some of the (stimulus) measures put in place by the government are helping," said Alistair Thornton, China economist at IHS Global Insight.

Eighty percent of electricity demand is generated by the industrial sector, and is therefore seen as a good indication of the factory activity in the mainland.

"The stabilization looks to be on firmer ground. Over the next couple of months, the economy will most likely continue to bounce off the bottom," he said.

Thornton added that growth in fixed investment — which rose an annual 20.7 percent, a touch faster than the 20.5 percent reported for January-September — is also significant.

While the rise sounds minimal, Thornton said, it is significant because "for one month's data to put up a full year's worth you would have seen a solid pick-up in activity."

He added that the majority of growth in the fixed asset investment space is taking place in areas such as waterworks, highways and railways – in line with the government's new stimulus spending.

In addition to a pick-up on the investment side, Donna Kwok, Greater China economist for HSBC, said what's most important is that it looks like the consumer is starting to spend too, pointing to the improvement in retail sales data.

(Read More: Why Inflation in China Will Raise Its Head Again)

Consumption is becoming an increasingly important component of the economy, accounting for 55 percent of GDP growth in the first nine months of the year, outpacing the share of investment, which contributed 50.5 percent. This is in keeping with Beijing's efforts to make the economy driven more by domestic consumption.

"The Chinese economy is no longer in as bad a shape as it was a quarter earlier, and it's definitely in much better shape than back in 2009," she said.

By CNBC's Ansuya Harjani

Contact Asia Economy

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