China's manufacturers saw growth shrink for a 12th successive month in October, but output at a three-month high and the most robust order books since April signal a strengthening recovery, preliminary results of a purchasing managers survey show.
The China HSBC Flash Manufacturing Purchasing Managers Index (PMI) rose to a three-month high of 49.1 in October, the latest indicator of the real economy since official data last week showed GDP growth fell below target in Q3, despite signs of strength in September.
The uptick in the headline index, along with rises in new orders and output - its two biggest sub-components - and broad improvement in export orders, inventories and prices charged, all signal a turnaround in the world's second-biggest economy.
It will likely be a slow recovery though, as the PMI stayed below the 50-point level separating expansion from contraction.
"October's flash PMI reading continues to recover for the second month, thanks in part to a gradual improvement in the new orders index which picked up to a six-month high," Qu Hongbin, chief China economist at index sponsor, HSBC, said in a statement accompanying the data.
"However, external challenges still abound and pressures on the job market are lingering. This calls for a continuation of policy easing in the coming months to secure a firmer growth recovery," he added.
The flash PMI findings follow a Reuters poll on Monday, taken after last week's GDP data, which showed economists anticipating a modest rebound in growth in Q4 to 7.7 percent from Q3's below target 7.4 percent. However, even that number will not be enough to lift full year expansion from an expected 13-year low.
Analysts broadly believe Beijing must keep the pro-growth policies of the last year in place after a once-a-decade leadership transition at the top of the ruling Communist Party kicks off at a congress next month.
They say a surprisingly strong bounce in China's exports last month, as factory output, investment and retail sales all pulled slightly ahead of expectations, show policies are gaining traction - boosted most recently by infrastructure project approvals in September worth $157 billion.
And with the financial system's liquidity taps also open, economists expect a steady, if unspectacular, recovery to be achieved at current settings without additional stimulus.
SIGNS OF STABILISING
"The emerging signs of bottoming and stabilising economic growth have reduced the need for aggressive policy easing in the short term, but the policy stance should remain accommodative to continue supporting growth," Peng Wensheng, chief economist at China International Capital Corporate, wrote in a note to clients after the GDP data.
Chinese banks are on course to make new loans worth more than 8.5 trillion yuan in 2012, expansionary versus the 7.5 trillion of new loans extended in 2011 and above the 8 trillion yuan that sources told Reuters back in February was the target for 2012.
Meanwhile the total social financing aggregate, a broad measure of liquidity in the economy, stood at 1.65 trillion yuan in September, up from 1.24 trillion yuan in August.
Analysts expect no further cuts to interest rates this year or next after back-to-back cuts in June and July, and only one more 50 basis point cut to banks' required reserve ratios (RRR) in 2012 after three since late 2011 that have freed an estimated 1.2 trillion yuan for new lending.
Businesses though say conditions remain tough.
Chinese excavator maker, Sany Heavy Industry Co Ltd (600031.SS), told Reuters on Tuesday that domestic market conditions for its industry segment had deteriorated by as much as 20-30 percent between January and September from a year ago.
External headwinds have been the main cause of the rapidly cooling growth in China's export-sensitive economy from 2011'S 9.2 percent expansion.
Exports were worth 31 percent of GDP in 2011, according to the World Bank, and supported an estimated 200 million Chinese jobs. A festering debt crisis has dented demand from the European Union - China's biggest foreign market - and ultimately weighed on the domestic economy.
The combination has seen manufacturers slash inventories in the face of faltering demand. A turnaround for industry is likely only assured when months of de-stocking end.
The flash PMI offered tentative signs of a shift emerging, with stocks of purchases at their strongest since July and stocks of finished goods at their weakest since March. That implies an upturn in orders will be met by a rise in production.
The HSBC flash PMI is published approximately one week before final PMI data are released. The flash estimate is typically based on 85-90 percent of the total PMI survey responses gathered by UK-based data provider, Markit.