Green Shoots In Chinese Manufacturing; Is The Public Sector Driving?

Continuing with the theme of economic stabilization in China (see discussion), the final manufacturing PMI number for November is showing that manufacturing contraction has been halted. In particular, the PMI component exhibiting some promise is the change in new orders.

Clearly growth is still anemic, but for the first time in months China's manufacturing activity is showing some signs of life.

HSBC: The volume of new orders received by Chinese manufacturers increased during October, and for the first time in a year. The seasonally adjusted index indicated the growth rate of new orders was only marginal. However, it was the second-highest index reading in the past 17 months. Nearly 20% of panelists noted an increased amount of new orders, whereas just over 18% reported a fall. A number of firms that recorded an increase in new orders attributed growth to a rising number of new clients.

Much of the growth however seems to be emanating from the public sector - particularly infrastructure projects.

Fox Business: The HSBC China flash PMI - which gathers more data from smaller, privately-held firms with a strong export focus - signaled that November growth in the manufacturing sector quickened for the first time in 13 months, with a reading of 50.4 when it was published last week, reflecting a steady uptick in the economy. A PMI reading below 50 suggests growth slowed, while a number above 50 indicates an acceleration.

But analysts caution that growth has been revived through top-down easy credit to state-owned firms and infrastructure projects that lack the dynamism of China's private economy, which is struggling with credit curbs and a policy-induced slowdown in the speculative real estate sector.

"The improving numbers are mostly because of government investment," said Dong Xian'an, an economist with Peking First Advisory. "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."