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Chinese industry on more solid ground: surveys
Updated: 2009-07-02 16:22

BEIJING: China's manufacturing sector extended a steady if unspectacular recovery in June, surveys released on Wednesday showed, adding to evidence across Asia that the regional economy is finally pulling out of a deep dive.

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"I believe the current recovery has been confirmed and can be sustained," Fan Gang, an economist who advises the central bank, told a financial forum.

Fan predicted China's exports will be growing again, from a low base, by the end of the year.

The official purchasing managers' index (PMI) for June rose to 53.2 from 53.1 in May, consolidating for the fourth month in a row above the watershed mark of 50.

A companion index compiled for brokerage CLSA improved to 51.8 from 51.2, its third month in positive territory, as output grew at the strongest rate in a year and overseas orders rose for the first time in 11 months.

A reading over 50 indicates an expansion in manufacturing sector, while one below 50 suggests contraction.

"We take it as signalling that the green shoots of economic recovery have taken root and are likely to blossom in the second half of 2009," Steven Zhang and Qing Wang at Morgan Stanley said in a note to clients.

Beijing responded to last autumn's slump in global demand with a massive 4 trillion yuan ($585 billion) stimulus package, moderately ease credit policy and an array of tax breaks.

Alongside improvements in other timely data such as power consumption, tax revenues, industrial profits and cars sales, Wednesday's reports indicate that the pump-priming is working.

China accounts for only 7 percent of global output at market rates, so it cannot be expected to haul the rest of the world out of recession. But global investors have responded positively to the improved news flow recently out of Beijing.

Japanese construction makers such as Komatsu and Hitachi Construction, which often rise when there are expectations of orders to be won in China, gained 1.8 percent and 1.6 percent, respectively, on Wednesday. The surveys also helped to underpin a rebound in oil prices

But the survey's main sentiment index for big manufacturers did not recover as much as the market expected. It reached minus 48 from minus 58 in March, below forecasts of a minus 43 reading.

"The overall impression is that Japanese firms are facing a more severe situation than market players think," said Susumu Kato, chief economist at Calyon Capital Markets Japan.

The recovery in export business revealed in the Chinese surveys was partially reflected in South Korea, where exports fell by 11.3 percent in June from a year earlier, the slowest decline since October.

"The worst is apparently behind us, and the economy is gearing for a faster-than-expected recovery," said Song Jae-Hyok, an economist at SK Securities.

A survey of Indian manufacturers was also broadly positive, with domestic demand boosting activity to an eight-month high.

Economists at JP Morgan last Friday raised their projection for second-quarter gross domestic product growth in emerging Asia, forecasting quarter-on-quarter growth of more than 10 percent at an annualised rate. That reflects assumptions that quarter-on-quarter growth in industrial output will surge at a 35 percent annualised pace - and nearly 40 percent in China's case.

The World Bank, the Organisation for Economic Cooperation and Development and a clutch of banks have all upgraded their growth forecasts for China in the past two weeks.

The government's goal of 8 percent GDP growth for all of 2009, once dismissed as fanciful, now looks attainable.

Andy Rothman, CLSA's China macro strategist, reaffirmed his target of 8 percent but said the risks were now clearly on the upside. "It is now safe to say that a sustainable recovery is well under way in China," he said in a note to clients.

Likewise, Mingchun Sun with Nomura in Hong Kong said the buyers' surveys suggested that the revival in manufacturing was gaining a stronger foothold and reaffirmed his forecast of 8 percent GDP growth this year and 10 percent in 2010.

Not everyone is getting carried away.

Li Hongrong, an economist with Ping An Securities in Shenzhen, cautioned that momentum in investment and industrial output could fizzle out.

"It is hard to say whether economic growth will trace a V or a W shape, but we believe a slowdown will take place next year when the effects of the government's push run out," Li said.