Sept. 1 (Bloomberg) -- China’s manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.

The Purchasing Managers’ Index rose to a seasonally adjusted 54 from 53.3 in July, the Federation of Logistics and Purchasing said in an e-mailed statement today in Beijing. A PMI released by HSBC Holdings Plc also climbed.

Gains in output, orders and jobs added to evidence that Premier Wen Jiabao can meet his 8 percent growth target for the year as a stimulus package counters falling exports. The Shanghai Composite Index plunged into a bear market yesterday on concern that the world’s third-biggest economy will slump as banks rein in credit growth to avert asset bubbles and bad loans.

“China’s equity market has taken a battering in the past few weeks, but the economic data suggests that the recovery remains on track,” said Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong. “Beijing still faces the difficult task of managing liquidity conditions to avoid a bubble or a bust.”

Shanghai’s stock index closed 0.6 percent higher after tumbling 6.7 percent yesterday. Asian stocks rose.

New loans plunged to 355.9 billion yuan ($52 billion) in July, less than a quarter of June’s level, and may slump to 200 billion yuan in August, the Beijing-based business magazine Caijing reported yesterday without citing anyone.

Maintaining Momentum

The government-backed PMI “shows that China’s economic rebound will maintain momentum,” Zhang Liqun, a researcher at the State Council Development and Research Center, said in today’s statement. Zhang cautioned that there were “uncertainties” in the economy and a mix of “positive and negative factors.”

Economic growth accelerated to 7.9 percent in the second quarter from a year earlier on the nation’s $585 billion stimulus package and more than $1 trillion of new loans in the first half. The 6.1 percent expansion in the first three months of the year was the weakest in almost a decade.

Eighteen industries, including petrochemicals, beverages, metal processing and equipment manufacturing reported expansions in the PMI data. Only textiles and pharmaceuticals contracted.

The output index rose to 57.9 from 57.3 in July. The measure of new orders climbed to 56.3 from 55.5. An export-order index was unchanged at 52.1. An employment index gained to 51.4 from 50.8. Readings above 50 indicate expansions.

Boost for Consumption

“This clearly shows that we are in a broad-based economic recovery,” said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong. The gain in jobs was “very encouraging, as it shows that firms are confident enough to increase hiring, which will also help boost consumption for the rest of the year,” he said.

Economic growth will continue to quicken in the third and fourth quarters, reaching 8.3 percent for the year, according to a Bloomberg News survey of 21 economists.

Subsidies for purchases from cars to home appliances are aiding manufacturers by stoking domestic demand as the global recession cuts exports. Shenzhen-based BYD Co., a Warren Buffett-backed maker of cars and rechargeable batteries, almost doubled first-half profit as stimulus measures boosted sales.

The State Council, China’s cabinet, said last month that it saw signs of a recovery in manufacturing and also announced plans to curb overcapacity in the steel and cement industries.

Official Concern

“A continued rise in the PMI fueled by domestic demand may have reinforced the authorities’ concern” about excess capacity, said Sherman Chan, a Sydney-based economist with Moody’s Economy.com.

The HSBC PMI, previously released by CLSA Asia-Pacific Markets, showed an overall increase to 55.1 from 52.8 in July and a jump in export orders.

Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong, said a rise in the import index in the government- backed PMI signaled a looming export recovery as the nation sourced materials to be processed into overseas shipments.

Both surveys showed inflation pressures, with indexes of input prices rising to 13-month highs. The central bank said in July that consumer prices may rebound after bottoming out in the third quarter. Prices have fallen for six straight months.

In contrast, former Morgan Stanley Asia economist Andy Xie predicts the Shanghai Composite Index may fall a further 25 percent because China’s recovery “isn’t sustainable.”

Government efforts to control lending have included requiring lenders to raise reserves to 150 percent of non- performing loans by the end of this year. Bank of China Ltd., which advanced the most new credit in the first half, said Aug. 27 that it will slow loan growth in the second half and improve loan quality.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: September 1, 2009 04:15 EDT