China Factory Sector Strongest Since May 2011: Report

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Activity in China's vast manufacturing sector hit its fastest pace in December since May 2011, a survey of private factory managers showed, with a sub-index for new orders pointing to continued strength in the new year.

The final reading for the HSBC Purchasing Managers' Index rose to 51.5 in December, well above the preliminary reading of 50.9 published in the middle of the month and November's final reading of 50.5.

A complementary December survey by China's National Bureau of Statistics, due to be published on Tuesday, is expected to show similar signs of manufacturing strength. Economists polled by Reuters expect the official PMI to show a rise to 51.0 from 50.6 in November, expanding at its fastest pace in eight months.

(Read More: Coming Soon: China's Growth Resurgence?)

The HSBC PMI rose above 50, the line that demarcates accelerating from slowing growth, in November for the first time in more than a year.

The survey results fit with a growing consensus that the Chinese economy revved back up in the fourth quarter, after growth slowed for the seventh consecutive quarter to 7.4 percent in the third.

A sub-index tracking new orders showed even more room for optimism, rising to 52.9, its highest level since January 2011.

"Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise," Hongbin Qu, HSBC's chief economist for China, wrote in a note accompanying the survey.

"This, plus Beijing's reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6 percent year-on-year in 2013, despite the ongoing external headwinds."

In another sign of factory-sector growth, a sub-index tracking output rose to its highest level since May 2011.

The improving economic picture seems primarily linked to domestic demand, as China's export sector continues to grapple with a slowdown in its biggest markets. A new export orders sub-index retreated below 50 in December, after rising into expansionary territory in November for the first time in seven months.

"Infrastructure and housing are picking up, so related sectors like steel and cement are picking up," said analyst Zhang Zhiwei from Nomura International in Hong Kong.

"It's more driven by investment than consumption."


China is on course to achieve growth of 7.7 percent in 2012, according to forecasts in a benchmark Reuters poll, the slowest full year of expansion since 1999.

While that is way above the world's other major economies, it is below the roughly 10 percent annual growth seen for most of the last 30 years.

Manufacturing activity could be buoyed by brisk consumption in the final month of the year and the end of a destocking cycle, Xie Yaxuan, an analyst at Merchants Securities, said last week.

The government so far has relied on fine-tuning its policy settings to try to combat the worst downturn China has faced since the 2008-09 global financial crisis, studiously avoiding any hint of repeating the 4 trillion yuan ($640 billion) stimulus package it launched back then.

Measures to boost growth included injecting liquidity into the financial system through money market operations and accelerating approval of infrastructure projects.

However, while the central government has pledged to continue its strict property market controls, land prices have ticked up in many regions and developers are once again openly marketing luxury second homes, even in the capital. China's property sector directly supports over 40 industries.

Chinese Vice Finance Minister Li Yong, in comments published on Dec. 26, warned of rising risks in the banking sector and pressure on government revenues in 2013.

Regulators are increasingly concerned over the risks posed by investment products that offer higher returns to depositors and investors, and help channel money into China's higher-interest rate shadow banking system.

Economist Michael Pettis of Peking University's Guanghua School of Management warned that even if regulators act to limit the proliferation of wealth management products, China will still see shrinking returns unless it moves away from its investment-led growth model.

"The problem is the inexorable tendency of the current development model to generate debt faster than it generates debt-servicing capacity," Pettis wrote in a recent newsletter.

"Growth in China is currently dependent on an unsustainable increase in debt."