China Manufacturing Pickup Shows Rebound Gains Traction: Economy

China’s manufacturing unexpectedly expanded at the fastest pace in 19 months in December, boosting optimism that a recovery in the world’s second-biggest economy is gaining traction.

The final reading of a Purchasing Managers’ Index was 51.5 in December, according to a statement from HSBC Holdings Plc and Markit Economics today. That compares with the 50.9 preliminary reading on Dec. 14 and a final 50.5 in November. A level above 50 indicates expansion.

China’s economy may have rebounded after a seven-quarter slowdown as the government increased spending on infrastructure and accelerated investment-project approvals. The pickup may smooth the ruling Communist Party’s once-a-decade transition to a new generation of leaders headed by Xi Jinping, who took office as general secretary in November.

“Momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilize,” Qu Hongbin, chief China economist at HSBC in Hong Kong, said in the statement. Manufacturing output and purchasing accelerated this month, even as new export orders showed a “slight fall” on weak demand in Europe, Japan and the U.S., HSBC said.

The median forecast of 14 economists surveyed by Bloomberg News was for a final reading of 50.9.

A separate, government-backed purchasing managers’ index probably rose to 51 in December from 50.6 the previous month, according to the median estimate in a Bloomberg News survey of 25 economists ahead of the report due tomorrow. That would be the highest reading in eight months.

Stocks Rise

The benchmark Shanghai Composite Index of stocks advanced 1.6 percent to finish 2012 up 3.2 percent, the first annual gain in three years. The gauge has risen 16 percent since this year’s closing low on Dec. 3 as a pledge by the nation’s new leaders to promote the development of towns and cities boosted optimism corporate earnings will improve.

Chinese industrial companies’ profits rose for a third month in November, statistics bureau data showed on Dec. 27.

Japan’s Komatsu Ltd. (6301), the world’s second-largest maker of construction equipment, sees a “best-case scenario” for China demand to increase 20 percent in the fiscal year starting April 1, Chief Executive Officer Kunio Noji said on Dec. 18.

Economic growth probably accelerated to 7.8 percent in the fourth quarter from a year earlier, up from a three-year low of 7.4 percent in the previous period, according to the median estimate in a Bloomberg News survey of 34 economists this month. The government will release its report Jan. 18.

Wider Deficit

The nation will target a 50 percent increase in the budget deficit next year, a person familiar with the matter told Bloomberg News last week, a sign that extra spending may aid domestic demand and sustain growth as exports struggle.

Elsewhere in Asia, South Korea’s inflation eased to the slowest pace in four months in December, with consumer prices rising 1.4 percent from a year earlier, data showed today. Singapore Prime Minister Lee Hsien Loong may announce the country’s annual growth rate in his new-year message today while a survey showed Sri Lanka inflation probably moderated in December from a three-month high.

Portugal will release industrial production and retail sales data for November, while the Dutch statistics agency may confirm growth contracted in the third quarter. In the U.S., the Federal Reserve Bank of Dallas will release its index of Texas manufacturing activity for December.

Controlling Risks

The pace of China’s rebound may be tempered by a slowdown in credit growth. In its quarterly monetary policy report released Dec. 28, the People’s Bank of China highlighted the need to control risks as one of its objectives, a possible sign of growing concern that a surge in non-bank lending over the past two years will lead to defaults.

Today’s report “further suggests the recovery is on track and that growth may remain strong” in the first quarter, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note. “Nonetheless, we are concerned about the sustainability of the recovery” in the second half given the central bank’s comments, which suggest regulators may tighten controls to contain financial risks, Zhang said.

The findings of a private survey modeled on the U.S. Federal Reserve’s Beige Book also question the recovery’s staying power. Improvements in retailing, real estate and mining in the fourth quarter were countered by rising inventories and lower corporate borrowing, according to the China Beige Book report issued last week.

The nation’s budget deficit may widen to 1.2 trillion yuan ($193 billion) in 2013, including the sale of 350 billion yuan of bonds to fund local governments, Bloomberg reported on Dec. 27, citing a person who asked not to be identified because the deliberations are not public. A bigger gap may help pay for tax cuts and measures to boost urbanization and consumer demand.

--Zheng Lifei, Zhou Xin. With assistance from Nerys Avery in Beijing and Shamim Adam, Rina Chandran and Ailing Tan in Singapore. Editors: Scott Lanman, Paul Panckhurst

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net; Zhou Xin in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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