China Economy Strengthens as Factory Gauge at 16-Month High

China’s economy is strengthening after a two-quarter slowdown, with a manufacturing gauge rising to a 16-month high in August as new orders jumped and overseas demand rebounded.

The Purchasing Managers’ Index was at 51.0, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday in Beijing. A separate manufacturing PMI released today by HSBC Holdings Plc and Markit Economics rose to 50.1 last month from 47.7 in July, the biggest gain in three years and the first reading above 50 since April.

Improvement in manufacturing may bolster confidence that the economy is responding to Premier Li Keqiang’s policies to support growth amid a crackdown on shadow banking aimed at curbing financial risks. JPMorgan Chase & Co. yesterday joined Deutsche Bank AG and Credit Suisse Group AG in raising estimates for an increase in gross domestic product, citing strength in infrastructure and real estate, and a pickup in exports.

“The recovery is being driven primarily by domestic demand but international demand is picking up too as we can see from the jump in new export orders,” said Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong. “This will surely boost markets’ confidence in China’s recovery amid the turmoil in some emerging markets.”

The Shanghai Composite Index fell 0.4 percent at 9:47 a.m. local time. It rose 2 percent last week, the biggest gain since March.

Orders Jump

The official PMI figure compared with the 50.6 median estimate of 31 analysts in a Bloomberg News survey and July’s 50.3 level. Estimates ranged from 50.4 to 52. The preliminary reading of HSBC’s index released Aug. 22 was 50.1, while the median estimate of 13 analysts was for a 50.2 final level.

JPMorgan raised its estimate for China’s third-quarter economic growth to 7.6 percent from 7.4 percent and its projection for the final three months of the year to 7.5 percent from 7 percent, Hong Kong-based chief China economist Zhu Haibin said in a report yesterday. “Economic conditions are improving and the downside risk to economic growth has been mitigated in the near term,” Zhu said.

Deutsche Bank lifted its third-quarter estimate to 7.7 percent from 7.5 percent, according to an Aug. 22 note. Credit Suisse last week increased its 2013 forecast to 7.6 percent from 7.4 percent.

Tolerate Slowdown

China’s GDP growth slowed to 7.5 percent in the second quarter from a year earlier, extending the longest streak of sub-8 percent expansion in at least two decades and putting the government at risk of missing its 2013 goal of 7.5 percent. Li signaled in July he won’t tolerate a slowdown beyond a 7 percent bottom line.

A sub-index of new orders in yesterday’s report rose to 52.4, the highest level since April 2012, and a gauge of input prices was the highest since February.

“Input prices are usually a good tracker of the strength of aggregate demand relative to supply so the reading suggests demand has strengthened notably,” said Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong. “Sector-specific measures adopted recently are starting to show an impact but it also implies a lower probability for high-profile easing.”

Li has avoided a broad-based stimulus to reverse slowing growth, instead rolling out targeted measures that include tax cuts, boosting infrastructure spending including on railways, and supporting strategic industries such as renewable energy.

Export Outlook

China’s top solar-panel makers are returning to profitability following two years of losses as higher demand and prices drive up margins. JinkoSolar Holding Co. last month reported second-quarter net income of $8 million, its first profit since the third quarter of 2011, as sales jumped 43 percent from a year earlier.

China’s export outlook improved, with a gauge of new overseas orders in yesterday’s report rising above 50 for the first time since March. While that contrasts with the contraction indicated in the export index of HSBC’s PMI, it tallies with trade reports from Asian economies and signs of stronger growth in the U.S. and Europe.

South Korea’s exports jumped 7.7 percent in August from a year earlier, the government said yesterday, the biggest gain since January.

The U.S. economy expanded more than analysts estimated in the second quarter, an Aug. 29 Commerce Department report showed. Economic confidence in the euro area rose to a two-year high, according to data last week.

‘Modest’ Impact

China’s official PMI indicates the impact of the government’s crackdown on non-bank financing and its efforts to rein in credit growth have “so far been modest,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong.

Interest rates in China’s interbank market surged to record highs in June as the central bank allowed a cash crunch in order to squeeze speculative lending and curb shadow banking. Aggregate financing, the broadest measure of new credit that includes banks’ off-balance-sheet loans, corporate bond and stock issues, fell to a 21-month low in July.

While the campaign will help ease the risks of a financial crisis, it may also curb economic expansion as companies find it harder to get funding.

“The current rebound in growth is still benefiting from loose monetary and credit conditions earlier this year,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “But since May, conditions have tightened considerably and that will weigh on investment and growth toward the end of the year.”

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