More Green Shoots Strengthen Case for China Bulls

Even as market watchers continue to debate where the Chinese economy is headed, latest manufacturing numbers strengthen the case for the China bulls, at least for now.

More Green Shoots Strengthen Case for China Bulls
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The China HSBC Flash Purchasing Managers Index (PMI), a survey of business conditions for small and medium-sized companies, rose to a three-month high of 49.1 in October, from 47.9 in September, helped by a strong pickup in new export orders. A reading above 50 indicates expansion and below signals contraction.

Growth momentum in the manufacturing sector - measured by new orders minus finished inventory - jumped to a 12-month high, ending five straight months of negative readings.

"This confirms recovery in Chinese manufacturing (which was seen) in the September industrial output data, and overall recovery of GDP (gross domestic product) growth indicated in third quarter data. We believe growth momentum will keep improving," Dariusz Kowalczyk, senior economist at Credit Agricole wrote in a note on Wednesday.

Industrial production in September rose to a better-than-expected 9.2 percent, up from 8.9 percent in August.

(Read more: Earnings Tea Leaves: Signs of Life in China's Economy?)

Jian Chiang, China economist at Barclays, agrees that the latest manufacturing data signal a pickup in overall economic momentum in the fourth quarter, adding that she expects her 7.6 percent forecast for GDP growth in 2012 to come in better.

"The data paint a consistent picture of growth stabilization in China…the third quarter now marks the bottom of the cycle," she said.

Export Sector

While the rise in the new export orders index to a five-month high reflects pickup in external demand, China watchers think it's too early to confirm whether the export sector is out of the woods.

The improvement in new export orders was likely helped by Christmas orders and the recent stabilization in the U.S. economy, said Junwei Sun, China economist at HSBC, adding that the outlook for the export sector remains challenging given weakness in demand from Europe.

The autumn session of the 2012 Canton Fair, a trade fair held twice a year in Guangzhou, has shown a 11.4 percent decline of foreign buyers compared with the spring session, Sun said, foreshadowing a difficult environment for exporters.

Alistair Thornton, senior China economist at IHS Global Insight, who is also cautious in his outlook for the export sector, said recent optimism over China's trade data has been overdone, adding that the bounce in September export numbers could be a one-off.

China's exports grew 9.9 percent year-on-year last month, almost twice the rate forecast by analysts.

"China is hostage to the global economic environment. So much depends on what goes on in the rest of the world, there isn't a huge amount the government can do. Optimism over exports might be slightly misplaced because we haven't seen a marked improvement in global trade activity," he said.

(Read more: Chinese Exporters Fear Grim Outlook)

Unlike Kowalczyk who believes China's economy has turned a corner, Thornton says it may be too early to cheer the recent improvement in economic data.

"The economy is beginning to bottom out, but it doesn't mean it's out of the woods. There is a huge amount of downward pressure as the external environment - Europe and the U.S. - remains pretty muddy at the moment," Thornton said.