Growth back to factories in China

The Chinese manufacturing sector expanded in November for the first time in more than a year, according to the early reading of a business survey released recently, the latest sign that the Chinese economy might have skirted the sharp slowdown that many economists had earlier feared.

Greater demand for Chinese goods around the world and a series of domestic stimulus measures are trickling through the Chinese economy, breathing life into the giant factory sector.

A monthly purchasing managers index published by the British bank HSBC rose from 49.5 in October to 50.4 in November, climbing above the threshold of 50 that separates expansion from contraction for the first time in 13 months.

The preliminary reading of the HSBC index is one of earliest indicators to shed light on the Chinese economy’s performance each month, and it is closely watched by economists and investors.

If confirmed by further economic data in the coming weeks, the improved performance would cement a picture that has been crystallising for the past couple of months: that the slowdown in growth that buffeted China for much of the past year has now bottomed out.

Indeed, many analysts believe the Chinese economy has already put the worst behind it, and that the recovery is gaining traction.

The HSBC reading suggests that the “upswing in China — and by extension in the whole Asia-Pacific region — is gathering strength,” Klaus Baader, an economist at the French bank Société Générale in Hong Kong, commented in a note. The report, he added, “should further dispel fears of a hard landing.”

Relaxed restrictions on bank lending, accelerated infrastructure investment, and two small interest rate cuts over the summer have helped reinject some dynamism, analysts said. The housing sector has stabilised after suffering from government-mandated restrictions aimed at reining in soaring prices in recent years.

At the same time, overseas demand for exports also has improved somewhat in recent months and has led to a marked improvement in export orders, according to the survey.
Analysts caution, however, against expecting a sharp bounce back to the double-digit annual growth rates seen before the global financial crisis.

The current recovery, Qu Hongbin, chief China economist at HSBC, said in a note accompanying the survey results, is still in its early stages. More policy easing is necessary to strengthen the recovery, especially given the still uncertain global environment, Qu commented.

The US tax increases and spending cuts set to take effect in January and the euro zone debt crisis remain “a key risk factor in China’s road of economic recovery going into next year,” economists at JP Morgan said in a research note.

Many analysts expect the Chinese economy to grow at rates between 7 per cent and 8 per cent in the next few years.

The JP Morgan team, for example, forecasts 7.6 per cent for this year, and 8 per cent for 2013. Both the World Bank and the International Monetary Fund forecast that expansion will tick up to a little more than 8 per cent next year, from slightly less than 8 per cent this year.

While that is well above the growth rates seen in Europe, Japan and the United States, such figures are well below the 9.3 per cent expansion in 2011, and the 10.4 per cent growth rate in 2010.

With a new leadership now taking the helm in Beijing, attention has also shifted to the longer-term issues that many economists say need to be addressed to keep China on a path of rapid growth.

The incoming leadership has already signaled that combating rampant corruption and addressing the environmental degradation caused by the headlong economic expansion of the past years are important priorities.

On the economic front, analysts say the economy needs to be weaned from the reliance on exports and investment in large infrastructure and other projects that underpinned past growth and the current recovery, toward more domestic and consumption-driven growth.

China’s demographics — an aging population will cause the proportion of nonearners to soar in the coming years — will also present major challenges in the coming decades.

The final November reading of the HSBC purchasing managers index will be published on December 3, while the Chinese authorities will publish a string of economic data starting in early December.