Asia Economy

China factory activity at fastest pace in over 2 years

China PMI readings indicate recovery: HSBC

Activity in China's vast manufacturing sector continued to pick up steam in July, two sets of data showed on Friday, as Beijing's drip-feed of stimulus filtered through the economy.

The official Purchasing Managers' Index (PMI) rose to 51.7 in July, its highest reading in 27 months, better than a Reuters forecast for 51.4 and after the 51.0 reading in June.

Meanwhile, the HSBC final PMI for July released shortly after also came in at 51.7, slightly lower than the 52.0 flash reading but still above the 50-point level separates growth in activity from contraction.

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The data helped to dispel some of the negativity in markets following the losses on Wall Street: Asian stocks trimmed their losses while the Australian dollar reversed losses, inching up 0.1 percent against the greenback.

The official survey showed a broad-based recovery in manufacturing activity in July, with 10 out of the 12 sub-indicies pointing to improvement from the previous month.

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A sub-index for new orders, a measure of both foreign and domestic demand, edged up to 53.6 in July from 52.8 in June, marking the highest level since May 2012.

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Meanwhile, export orders climbed to 50.8 in July from 50.3 in June, indicating a modest pick up in global demand.

But analysts remained cautious about getting too excited over the data, which is essentially the result of the government's broad-sweeping support measures.

"We've seen a mini stimulus being applied early in the second quarter that's now beginning to filter through and what's helping the manufacturing sector a little bit is somewhat better export numbers which obviously feeds into manufacturing as well," said Frederic Neumann, MD & co-head of Asia economic research at HSBC.

"It's a steady improvement but make no mistake, it is a result of an earlier easing of economic policy and that's still helping the economy."

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Neumann says China is doing a decent job of supporting the economy while rebalancing, but markets will want to see a greater push towards increasing domestic consumption.

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"I think it's really important to lay the groundwork for a sustained increase in consumption and remember that for 15-20 years, consumption has been restrained by certain policy settings as the government focused on industrialization, now has to reverse that. It's not about having a one-time shopping trip, it's really about giving people the means to have sustained consumption growth over the next 10, 15 years. And that's part and parcel of this policy but patience is really needed here," Neumann said.

Recent better-than-expected data has been a boon for China stocks, which has been among the world's worst-performing markets. The Shanghai Composite has risen 7 percent in the last eight trading sessions, hitting its highest levels this year.

"The stock market was very unloved for a very long time and we're starting to see a little bit more improvement, people looking at some pockets in Asia and clearly it's where people are looking to play," said Johanna Chua, chief economist of Asia Pacific at Citi, adding that the runup may not have legs.

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"[The data] reaffirms expectations that China growth has improved – this PMI data is supportive but it's increasingly being priced in given the price action we've seen in equities," Chua said.