UPDATE 2-China PMI survey shows growth reviving, but uneven

Lucy Hornby
Reuters Middle East

BEIJING, Dec 3 (Reuters) - The pace of activity in China's

vast manufacturing sector quickened for the first time in 13

months in November, a survey of private factory managers found,

adding to evidence that the economy is reviving after seven

quarters of slowing growth.

The final reading for the HSBC Purchasing Managers' Survey

(PMI) rose to 50.5 in November from 49.5 in October, in line

with a preliminary survey published late last month. It was the

first time since October 2011 that the survey crossed above 50

points, the line that demarcates accelerating from slowing


The final HSBC reading follows a similar survey by the

National Bureau of Statistics (NBS) released this weekend, which

showed the pace of growth in the manufacturing sector

quickening. The official PMI rose to a seven-month high of 50.6

for November, from 50.2 in October.

"This confirms that the Chinese economy continues to

recover gradually," HSBC's chief China economist Hongbin Qu


An official PMI survey of China's non-manufacturing sectors

also ticked up, to 55.6 in November from 55.5 in October, led by

expanded activity in construction services. But growth in air

and rail transport and food and beverages both slowed.

While a recovery in growth appears possible, there are

troubling signs that China is still relying too much on

state-led investment rather than the more dynamic private


Growth accelerated for large firms for the third month in a

row, but medium and smaller companies saw a retrenchment, with

the decline more pronounced for the smaller firms, the NBS said

in a not accompanying its official manufacturing PMI survey.

"The improving numbers are mostly because of government

investment," said Dong Xian'an, economist with Peking First

Advisory, referring to the official PMI.

"From the second quarter the government has unleashed a lot

of projects, and that has started to be felt in the economy, but

it's not a very healthy recovery yet."

In another sign that demand remains lacklustre, an HSBC

sub-index for output prices fell despite a rise in a different

sub-index for input prices, indicating that firms are unable to

pass rising costs on to buyers.

"Whilst we feel that the economy has been stabilized through

the short-term, we feel that the manner in which activity has

been revived will retard China's economic reform agenda and make

the transition onto a sustainable footing all the more tricky,"

wrote Xianfang Ren and Alistair Thornton of IHS Global Insight.


Smaller and private firms are still pleading for greater

access to credit and investment incentives, which have gone

disproportionately to the state sector, particularly since the

financial crisis of 2008-2009.

Government intervention to mask debt problems where they do

appear runs the risk of a socialisation of losses, the IHS

Global Insight analysts warned.

"Production can continue (hence contributing to GDP), and

employment can remain tight. Our fear, therefore, is that whilst

activity is resuming, economic efficiency is declining. This has

negative longer-term consequences."

Overall, China's economic health has improved since

September, with an array of indicators from factory output to

retail sales and investment showing Beijing's pro-growth

policies are starting to gain traction.

Output, new orders and new export orders all improved, the

official PMI showed, but a sub-index tracking employment

deteriorated. Private firms generally account for more new jobs

than does the state sector.

China's annual economic growth dipped to 7.4 percent in the

third quarter, slowing for seven quarters in a row and leaving

the economy on course for its weakest showing since 1999.

Given the recent signs of recovery, many analysts expect the

economy to snap out of its longest downward cycle since the

global financial crisis, and start to trend upwards in the

fourth quarter.

The end of a destocking cycle and a greater pace of

investment are expected to keep driving up domestic demand.

Economists also warn of downside risks from still cloudy

external markets. The European debt crisis and listless U.S.

economy continue to crimp demand from China's two largest trade


China's central bank has moved cautiously in easing monetary

policy to underpin economic growth, wary of reigniting

inflation and fanning property prices which are still high.

It cut interest rates twice in June and July and lowered

banks' reserve requirement ratio by 150 basis points in three

stages since last November, but has refrained from further cuts

since July. The authorities have opted to inject liquidity via

open market operations to pump short-term cash into money


The official PMI generally paints a rosier picture of the

factory sector than the HSBC PMI because the official survey

focuses on big, state-owned firms, while the HSBC PMI targets

smaller, private companies. There are also differing approaches

to seasonal adjustment between the two surveys.

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