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China factory activity picks up in October, recovery seen gradual

An employee works inside a steel factory in Caofeidian on the northeastern coast of China's Hebei province, October 11, 2013. REUTERS/China
An employee works inside a steel factory in Caofeidian on the northeastern coast of China's Hebei province, October 11, 2013. REUTERS/China

By Natalie Thomas

BEIJING (Reuters) - China's giant manufacturing sector strengthened further in October, two surveys showed on Friday, though mixed signals in important areas including export orders suggest any recovery in the world's second-largest economy will be gradual.

The overall message of stabilization is good news for the government as it readies a series of economic reforms at the Communist Party's third plenary meeting from November 9-12.

China's official Purchasing Managers' Index (PMI) reached an 18-month high of 51.4 in October, beating a forecast of 51.2 in a Reuters poll [ID:nL3N0IJ3MW]. A separate HSBC/Markit final PMI rose to a seven-month high of 50.9.

Both surveys were above the 50 line separating growth from contraction, but gave differing readings on new orders and new export orders -- falling in the official PMI and rising in the HSBC/Markit PMI.

"The PMI data for October shows a continued increase, indicating a preliminary stabilization in the economy," Zhang Liqun, an economist at the cabinet think-tank Development Research Center, said in a statement released with the official PMI.

"The foundation for a recovery is not yet solid," Zhang said, noting that order, inventory and purchasing price sub-indices decreased, "making it clear that companies are still rather cautions about the future outlook."

The official PMI is weighted more towards bigger and state-owned enterprises, while the HSBC/Markit survey focuses more on smaller and private sector firms.

NEW GROWTH MODEL

China's leadership has long said it intends to move away from an investment- and export-reliant growth model, which fuelled double-figure GDP increases over the past 10 years but has also led to economic distortions and high levels of debt.

They want to encourage consumption to provide more sustainable growth, and have made it clear they will accept lower growth rates while they push through their transformation.

China's economy grew 7.8 percent from a year earlier in the third quarter. That was only the second quarter in the past 10 in which growth had accelerated, and economists polled by Reuters see growth moderating again to 7.5 percent in the final three months of 2014.

That would be sufficient to come in above Beijing's 2013 target of 7.5 percent, after some concerns around the middle of the year that the economy was slowing more than expected. Still, the government target would be the weakest growth rate in 23 years.

"With global demand momentum likely to pick up gradually and domestic demand growth remaining solid, we expect GDP growth to comfortably exceed the government's bottom line in the coming quarters," Louis Kuijs, an economist at RBS, said in a note.

"This is in line with our relatively benign growth outlook," he added, referring to the official PMI.

In the official PMI, strong output was the main driver, jumping to 54.4 from 52.9. It was offset by weakness in new orders and new export orders, which both ticked down by 0.3 points, to 52.5 and 50.4 respectively.

The survey also showed smaller firms continued to underperform larger ones, with new orders in large enterprises reaching 53.8, while small businesses saw a contraction at 48.8.

The final HSBC/Markit PMI was unchanged from a preliminary flash estimate released last week and showed a tick up in both new orders and new export orders, as well as the first increase in employment in seven months.

"This in turn should support private consumption growth in the coming months. China is on track for a gradual growth recovery," said Hongbin Qu, HSBC's chief economist for China.

(Editing by John Mair)

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