China manufacturing edges towards growth

Chinese workers at a textile factory in Huaibei, China on February 10, 2012.

Story highlights

  • HSBC PMI, a closely watched indicator, rose to 49.5, a five-month high
  • Suggests government policies to support the economy are starting to work.
  • Chinese economy grew 7.6% in the first half of the year
  • That rate was the slowest since the peak of the financial crisis

China's manufacturing sector is clawing its way back towards growth in July, according to a survey that suggests government policies to support the economy are starting to work.

HSBC said its purchasing mangers' index for July was on track to rise from 48.2 last month to 49.5, which would mark a five-month high. But, in remaining below the 50 threshold, the flash PMI figure -- the earliest piece of monthly economic data for China -- indicates that factory activity is still contracting at a mild pace.

"Earlier easing measures are starting to work," said Qu Hongbin, head of Asian research at HSBC. "That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure. This calls for more easing efforts to support growth and jobs."

The Chinese economy grew 7.6 per cent growth in the first half of the year, its slowest since early 2009 at the peak of the global financial crisis. The government has tried to arrest the slowdown by spending more and easing monetary policy. Many analysts believe these measures will help the economy towards a recovery in the second half.

Yet investors remain sceptical about how strong the recovery will be. The country's benchmark stock index, the Shanghai Composite Index, has been on a three-month slide, bringing it close to its lowest level in three years.

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The renminbi has also come under selling pressure over the past month. On Tuesday, the Chinese currency hit its lowest level this year against the dollar after falling nearly 1 per cent to the bottom of its daily trading band. The recent weakness is indicative of some capital outflows from China and also suggests that the central bank might tolerate moderate depreciation to support exporters.

Although shifting its policy footing to a pro-growth stance, the government has been reluctant to deploy a large-scale stimulus as it did in late 2008. The critical factor in restraining its response has been relative stability in the labour market.

But while showing improvement on most fronts, the HSBC PMI pointed to a deterioration in the job market, with its employment sub-index declining. A rise in unemployment would put pressure on the government to do more to shore up growth.