China Manufacturing Grows as Europe Recovery Signs Build

Chinese manufacturing resumed expansion this month after shrinking the most in almost a year in July and output at European factories and services companies improved, a sign the global recovery is strengthening.

A preliminary purchasing managers index for China by HSBC Holdings Plc and Markit Economics rose to 50.1 from 47.7, exceeding all 16 estimates in a Bloomberg News survey. A reading above 50 indicates expansion. Manufacturing and services in the euro area also grew more than economists forecast in August, led by Germany.

China’s manufacturing, fueled by domestic demand after Premier Li Keqiang rolled out measures to support growth, indicates the world’s second-biggest economy is strengthening after a two-quarter slowdown. Global central bankers meet this week in Jackson Hole, Wyoming, to discuss the global economy as the Federal Reserve considers winding down the pace of monthly stimulus, a prospect that’s already roiled financial markets.

“We expect the euro-zone economy to continue its recovery in the remainder of this year, but it will likely be a slow and uneven process,” said Martin van Vliet, an economist at ING Bank NV in Amsterdam. “The recent slowdown in some key emerging economies could be an important headwind to euro-zone export growth. In that regard, it is encouraging to see that the Chinese PMI saw a sharp rebound.”

The 2.4-point jump in the China measure was the biggest gain since August 2010, when the gauge rose 2.5 points to 51.9, according to data compiled by Bloomberg.

“Domestic demand is strong enough to support 7.5 percent growth in 2013,” said Ken Peng, senior economist at BNP Paribas SA in Beijing. “Almost all of China’s economic data since July has shown improvements and suggests a rebound is underway.”

German Support

In the euro area, the services index advanced to 51 in August from 49.8 in July, London-based Markit said. Economists forecast an increase to 50.2, according to the median of 32 estimates. The factory gauge indicated expansion for a second month in August, rising to 51.3 from 50.3. A composite index covering both industries increased to 51.7 from 50.5.

The manufacturing index for Germany, Europe’s largest economy, soared to a 25-month high of 52, while the services gauge reached a six-month high of 52.4.

European shares rose, with the Stoxx Europe 600 Index adding adding 0.8 percent as of 10:55 a.m. London time. The MSCI Asia Pacific Index lost 0.9 percent. The yield on German 10-year bonds climbed six basis points to 1.935 percent, the highest since March 2012.

Gross domestic product in the euro region rose 0.3 percent in the three months through June after six quarterly contractions. The expansion was led by the region’s two biggest economies, Germany and France. Italy and Spain remained in recession.

Fed Tapering

U.S. stock-index futures advanced today, indicating the Standard & Poor’s 500 Index will rebound from a six-week low. The S&P fell 0.6 percent yesterday as minutes from the Fed’s July meeting showed officials support stimulus cuts this year if the economy improves.

“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”

The Fed, currently buying $85 billion a month in bonds, will probably reduce its purchases in September, according to 65 percent of 48 economists in an Aug. 9-13 Bloomberg survey.

Releases in the U.S. today include initial jobless claims, house-price numbers and the Bloomberg Consumer Comfort Index.

Concerns Recede

The main cause of China’s improved performance is increased confidence as Communist Party leaders indicate a commitment to sustaining growth and concerns recede after an interbank lending squeeze in June, said Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong.

China will reach the government’s 7.5 percent growth target this year and maintain that pace in 2014, a Bloomberg News survey of economists indicates.

HSBC’s PMI “confirms that the economy has stabilized in the short term and downside risks for the second half have declined,” said Zhang Zhiwei, chief China economist for Nomura Holdings Inc. in Hong Kong. Zhang sees “upside risks” to his forecast of 7.4 percent growth this quarter.

Deutsche Bank AG today raised its estimate for economic expansion in the July-September period to 7.7 percent from 7.5 percent and its fourth-quarter forecast to 7.8 percent from 7.7 percent.

The preliminary China reading is based on about 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers. The final report is due Sept. 2. The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own survey on Sept. 1.

Infrastructure Support

The biggest contribution to the gain in today’s PMI reading was from production and new orders, said Yao Wei, China economist at Societe Generale SA in Hong Kong. “Domestic demand is being driven by recovery in the property sector” while government support for infrastructure will start to show an effect in the next two months, she said.

“The problem is whether such stimulus is sustainable,” she said. “We are still relying on investment for growth and there will be downside risks beyond the third quarter.”

Investors are looking ahead to a meeting later this year where the Communist Party’s new leaders may unveil a blueprint for policy measures to sustain growth in coming years as higher labor costs and a shrinking working-age population weigh on the pace of expansion.

’Broadly Comfortable’

Signs that China is strengthening may help to counter investor pessimism toward emerging economies that has been fueled by the Fed’s indications it may rein in stimulus.

Emerging-market stocks are set for the biggest weekly decline since June 21 on concern capital outflows will accelerate. The MSCI Emerging Markets Index has dropped 4.3 percent this week.

Investors pulled $7.6 billion out of emerging-market funds in the first seven months of this year, while $155.6 billion poured into developed-market equity exchange-traded products, according to BlackRock Investment Institute. The Indian rupee fell to a record low this week, Thailand is in recession and Indonesian stocks have slumped about 20 percent since their peak.

— With assistance by Hu Shen

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