By Kevin Yao
BEIJING (Reuters) - Stronger-than-expected industrial output reinforced other signs that China's economy was stabilizing after slowing for more than two years, just as major emerging markets brace for potential fallout from an expected trimming of U.S. stimulus.
Factory output growth hit a 17-month high and retail sales grew at their fastest pace this year in August, increasing confidence that after contracting in nine of the past 10 quarters, the world's second-largest economy may be regaining some momentum.
But any recovery is set to be bumpy. China's leaders have made it clear they can accept slower growth as they try to wean the economy off a dependence on investment and exports in favor of domestic consumption.
And investors are worried about how emerging economies will fare when the U.S. Federal Reserve tapers its monetary stimulus, possibly as soon as next week, although analysts say China is better positioned than others to cope with capital outflows.
"The better-than-expected figures showed the recovering momentum of China's economy is stronger than market expectations," Li Huiyong, an economist at Shenyin & Wanguo Securities in Shanghai.
The government has set a growth target for 2013 of 7.5 percent, which would be the weakest in more than two decades.
As recently as a month ago, investors worried China could miss even that target, after domestic money markets were hit by an unprecedented cash crunch and annual growth slowed to 7.5 percent in the June quarter.
Since mid-year, a series of targeted steps by authorities, including quickening railway investment and public housing construction and introducing policies to help smaller companies, have built confidence, and data signals have been more positive.
Figures out earlier this month have shown robust exports and benign inflation in August, as well as signs of recovery in the manufacturing sector.
Shenyin & Wanguo's Li expects growth to pick up to 7.6 percent in the third quarter, and analysts at ANZ forecast full-year growth of 7.6 percent, just ahead of the government target.
Tuesday's data underpinned market optimism, with the CSI300 Index <.CSI300> of top Shanghai and Shenzhen listings extending gains to 1.4 percent from 0.4 percent before the data's release, to post its highest close in three months.
SIGNS OF STRENGTH
Factory output jumped 10.4 percent in August from a year earlier, accelerating from 9.7 percent in July, to post its biggest increase since March 2012, the National Bureau of Statistics said.
And retail sales rose an annual 13.4 percent in August, their fastest growth this year, while the annual pace of fixed asset investment picked up slightly to 20.3 percent in the first eight months of 2013.
Central bank figures showed new bank loans of 711.3 billion yuan ($116.2 billion) in August, higher than a forecast of 700 billion yuan in a Reuters poll and a further sign of confidence.
The central bank also said total social financing aggregate, a broad measure of liquidity, nearly doubled to 1.57 trillion yuan in August from 808.8 billion yuan the month before.
"The money and credit figures pointed to positive signs emerging in the economy and partially helped explain the strong recovery in economic activity," said Jiang Chao, analyst at Haitong Securities in Shanghai.
"It seems companies are rushing to get new financing, regardless of still-high money market rates right now, which indicates that sentiment over the economy is improving."
But growth in property investment slowed to 19.3 percent in the first eight months from a 20.5 percent pace in January-July, and the rise in revenues from property sales eased to 34.4 percent from 37.8 percent.
Analysts caution about expecting a sharp turnaround in the economy, given the risks from the Fed's tapering and China's efforts to press ahead with structural changes.
Authorities want to deal with widespread factory overcapacity, a decline of productivity as well as environmental and resource constraints. And they have refrained from broad stimulus measures, fearing that could push up local government debt and create housing market bubbles.
"Overall, the development in the Chinese economy is, just as we expected, moving towards a cyclical and temporary recovery. We are likely to see growth stabilizing in the remaining two quarters and overall growth at 7.5 percent," said Amy Zhuang, senior analyst with Nordea Markets in Copenhagen.
"After that growth may gradually decline as Beijing is actively pursuing a lower growth in order to push through structural reforms."
(Reporting by China Economics Team; Editing by John Mair)