China Economy

Latest China PMI shows economy is stabilising

The overall index rose to 49.1 this month, due to the growth in new export orders but an economist says external challenges still abound

PUBLISHED : Thursday, 25 October, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

Manufacturing on the mainland likely improved this month from the past two months although continuing to contract, adding to signs the world's second-largest economy is stabilising.

The purchasing managers' index (PMI), a leading economic indicator, hit a three-month high of 49.1 this month, a preliminary reading by HSBC and Markit Economics showed yesterday.

Last month's final reading was 47.9. A figure below 50 indicates contraction. A final reading is given on the first day of the following month.

In the third quarter, growth in gross domestic product slowed to a 14-quarter low of 7.4 per cent.

Among the PMI's sub-indices, the new orders index rose to 49.7 from 47.3 in September, while the new export orders index rose to 47.3 from 44.9.

But many economists forecast the economy is bottoming, as indicators for last month - including exports, retail and fixed asset investment - showed signs of growth.

"October's flash PMI reading continues to recover for the second month, thanks in part to a gradual improvement in new orders," Qu Hongbin, chief China economist at HSBC, said. "This is helped by the filtering through of the earlier easing measures."

He cautioned that "external challenges still abound, and the pressures on the job market are lingering, calling for a continuation of policy easing in the coming months to secure a firmer growth recovery".

Zhu Haibin, an economist at JPMorgan Chase, said the improvement was "broadbased", with production rising and stock of finished goods falling notably.

He said it could be attributed to the policy easing that has accelerated since May, including a pick-up in infrastructure investment and fiscal expenditure, accommodative liquidity and monetary policies and stabilisation in the housing market.

However, he cautioned that "weakness in the manufacturing sector" and a "fragile external environment" remain the biggest risks on the road to recovery.

For the mainland's steel industry, which began posting losses in the first half of this year, the outlook remains gloomy in the near future because of overcapacity and low profitability, Lu Wenzheng, an analyst at Standard and Poor's said yesterday.

Taking note of the rising growth momentum, Nomura expects the official PMI, to be released by the National Bureau of Statistics on November 1, to rise from 49.8 last month to 50.2 this month and GDP to rebound to 8.4 per cent this quarter.

JPMorgan economists said a significant enhancement of stimulus measures was unlikely.

"Fiscal measures will further support infrastructure investment and domestic demand," they said in a research note.

"We expect no further cut in interest rates and one more cut in the required reserve ratio for the rest of the year," the economists said.