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Has China's Long-Awaited Recovery Finally Arrived?

Thursday, 22 Nov 2012 | 1:41 AM ET

Has the much-awaited recovery in the world's second largest economy finally taken shape? The answer is yes if you go by the latest private sector index on manufacturing activity in China, which has expanded for the first time in more than a year.

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The November HSBC Flash Purchasing Managers Index, which hit a 13-month high of 50.4 in November, signals that the Chinese economy has escaped risks of a hard landing, said analysts. A reading above 50 indicates expansion, and below signals contraction.

"We're out of the woods here, it's going to be a V (shaped recovery). The new policymakers coming in certainly do not have an interest to see the economy tank next year," Frederic Neumann, co-head of Asian economics at HSBC told CNBC.

Improvement in the manufacturing sector was supported by an increase in new export orders, while employment in the sector contracted at a slower rate.

"It (PMI data) shows policy easing continued to support growth recovery, and reinforces our view that growth will pick up strongly in the fourth quarter," said Zhiwei Zhang, chief China economist at Nomura.

The Chinese government has stepped up policy efforts in recent months, through launching a $150 billion infrastructure stimulus package and providing tax breaks and subsidies to small firms.

Zhiwei reiterated the bank's forecast that growth will pick up to 8.4 percent in the last quarter of the year from 7.4 percent in the previous three months.

(Read More: Is China's Rebound Going to Be Better Than Expected?)

He added that the official PMI data due to be released on December 1, could come in better than expected. Nomura raised its estimates for the official PMI, which is compiled by the government, to 50.4 from 50.2. In October, the index rose to 50.2 from 49.8 in the previous month.

Barclays' China economist Jian Chang agrees the HSBC preliminary data released Thursday are encouraging, as the positive momentum seen in the September and October activity has sustained into November.

Chang who believes China will see full-year gross domestic product (GDP) growth of 7.5 percent to 8 percent, however, said she is not expecting an immediate acceleration in economic activity.

The new orders component of the PMI Index, which tracks domestic orders, increased at a slower rate in November, indicating that while the growth recovery is on track there is unlikely to be a sharp rebound, she said.

Export Demand Recovers

Alistair Thornton, senior China economist at IHS, added that the rising trend in new export orders, which is a reflection of external demand, is unlikely to be sustained at the current pace. The new export orders index rose to 52.4 from 46.7 in October.

(Read More: The Economic Indicators That Matter to China's Next Premier)

"It's slightly surprising to see dramatic improvement in new export orders. We can't see where this demand is coming from. If we'd seen a material improvement in the U.S. and euro zone it might make sense but there's been no real change in global economy," he said.

Thornton, who believes that the risk of a hard landing is receding by the day, said he doesn't see much scope for economic growth in the mainland to quicken substantially, given the weak external environment.

By CNBC's Ansuya Harjani