China Manufacturing Gauge Rises to Two-Year High

China’s manufacturing expanded in July at the fastest pace in more than two years, signaling a pickup in economic growth is strengthening amid government support policies.

The Purchasing Managers’ Index was at 51.7, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing, exceeding the median 51.4 estimate in a Bloomberg News survey and up from 51.0 in June. A separate PMI from HSBC Holdings Plc and Markit Economics rose to an 18-month high of 51.7. Readings above 50 indicate expansion.

The data signal the world’s two largest economies are gaining momentum, after the U.S. this week reported a 4 percent pace of expansion in the second quarter. A gauge of smaller manufacturers in China’s official PMI rose above 50 for the first time since March 2012, suggesting Premier Li Keqiang’s stimulus is reaching its targets.

“The government has been putting a lot of emphasis on the targeted easing measures, tailoring to the small-medium enterprises,” Chang Jian, chief China economist at Barclays Plc in Hong Kong, said on Bloomberg Television. “Growth seems to be stabilizing and the government would be able to focus more of its energy on the reform agenda in the second half of this year.”

Estimates for today’s official PMI from 37 analysts ranged from 51.0 to 52.4. The report is based on responses to surveys sent to purchasing executives at 3,000 companies.

The HSBC-Markit PMI, which is based on a survey of more than 420 companies, compared with a preliminary reading of 52.0 issued on July 24, which was also the median estimate for today’s final number. June’s reading was 50.7.

Stock Markets

The MSCI Asia Pacific Index fell, headed for its first weekly loss in three weeks, after U.S. stocks dropped yesterday amid weaker earnings and credit-market concerns. The gauge was 1 percent lower at 4:38 p.m. in Tokyo. The Shanghai Composite Index, which rose to a seven-month high yesterday amid optimism government stimulus is boosting growth, declined 0.7 percent.

A gauge of output in today’s official report jumped to 54.2, the highest reading since November, and a measure of new orders increased to 53.6, the highest since April 2012. Export orders rose for a third month to 50.8, the highest level since March 2013.

The business situation for small companies has turned around, which shows that preferential policies have taken effect and the macroeconomic environment has improved, the logistics federation said in a statement.

China’s GDP rose 7.5 percent in the April-June period from a year earlier, the first acceleration in three quarters.

Government Stimulus

The improvement from a 7.4 percent pace in the first three months of the year came after the government ordered targeted stimulus including tax cuts for small companies, and speeding up public investment and fiscal spending. The central bank cut reserve requirements for some banks and turned to unconventional tools such as relending to boost credit.

“The economy is clearly improving, driven mostly by government infrastructure investment” including railways and subways, Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in an e-mail. “But the pickup in manufacturing may not be enough to counter a property slump,” and the government will keep easing credit, fiscal and housing policies to achieve its growth goal of about 7.5 percent, Shen said.

A profit warning yesterday from China Rongsheng Heavy Industries Group Holdings Ltd., the country’s second-largest private shipbuilder, highlights the difficulties many companies are still facing amid industrial overcapacity and sluggish demand.

Canceled Orders

Rongsheng expects a “significant increase” in its net loss in the first half after customers canceling orders forced it to cut production, according to a filing to the Hong Kong stock exchange.

The biggest short-term risk to the economy is real estate, Markus Rodlauer, mission chief for China at the International Monetary Fund, said on a conference call this week to discuss its annual report on the country. Prices and sales of residential properties are declining and inventories are rising, government data show. UBS AG estimates real estate accounts for more than a quarter of final demand in the economy.

Local authorities are starting to loosen curbs on home buying. Hohhot, capital of Inner Mongolia, became the first city to scrap restrictions in June, followed by eastern cities including Jinan, Wuxi, Wenzhou, Hangzhou and Ningbo.

Property Shares

A gauge of property stocks in Shanghai rose 11.5 percent in July, the biggest monthly gain since December 2012, on optimism the easing, along with prospects for reform of the household registration system, will spur sales. It declined 0.7 percent today as Poly Real Estate Group Co. fell 2 percent and China Vanke Co., the biggest developer, lost 1.6 percent.

With growth stabilizing, the government can focus more on economic-policy shifts, said Chang of Barclays. The Communist Party this week announced a probe into former security chief Zhou Yongkang, a move that signals President Xi Jinping has amassed enough power to implement changes to reduce the state’s role in the economy and help sustain expansion, according to analysts including Chang.

“The government is trying to buy themselves some time and to stabilize growth, creating a more conducive environment to push for reform,” Chang said.

— With assistance by Xiaoqing Pi

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