China manufacturing tepid in Sept, small firms struggle

Reuters

* Official China PMI edges up to 51.1, below expectations

* Large firms seeing improvement, smaller ones struggling

* Adds to worries economic recovery may be losing steam

* Recovery may peak in Q3 - economist

BEIJING, Oct 1 (Reuters) - China's manufacturing growthedged up only slightly in September, official data showed onTuesday, with small firms struggling in the face of overcapacityand weak demand, adding to concerns a nascent economic recoverymay be foundering.

The official Purchasing Managers' Index (PMI) stood at 51.1last month from August's 51.0, below expectations in a Reuterspoll for a rise to 51.5, which would have been the highest in 17months.

Chinese factories have sent mixed signals on the extent oftheir latest rebound. A separate manufacturing PMI issued byHSBC on Monday showed manufacturing grew less than expected lastmonth on soft domestic demand.

"Although overall manufacturing is stable, development isnot balanced," said Zhao Qinghe, senior statistician at the NBSin a comment accompanying the PMI.

"The trend towards improvement for large and mediumcompanies is consolidating, but small companies facedifficulties," he said, noting overcapacity and weak demand.

The official PMI is more weighted towards larger,state-owned companies than the HSBC version.

The data showed the sub-index for small firms at 48.4, downfrom 48.8 the previous month, while that for large companiesrose to 52.1 from 51.8.

The overall new orders sub-index rose to 52.8 from theprevious month's 52.4, with export orders at 50.7 from 50.2.

Analysts have warned that China's economic rebound could beshort-lived due to its feeble foundation, and the government'spromise to avoid knee-jerk policy action that lifts growth inthe short run but hurts the economy in the long run.

"The question is how sustainable is the recovery," saidHaibin Zhu, chief China economist for JP Morgan in Hong Kong.

"We are still cautious, we see the recovery peaking in Q3and slowing in Q4 on a sequential basis."

POLICY RESPONSE

To shore up activity, China's government has loosened policyat the margins by accelerating infrastructure investment,sustaining spending in public housing, and cutting taxes forsmall firms.

This is unlike 2009, when the government launched a 4trillion yuan ($653.4 billion) stimulus package that rescuedChina from the depths of the 2008 global financial crisis, butsaddled its economy with debt problems that remain unresolvedtoday.

China's government has set a 7.5 percent growth target forthe economy in 2013, a goal officials say would be met, butwhich would still mark the slackest pace of expansion in 23years for the nation.

"Our ANZ China Commodity Index (CCI) also witnessed asignificant pullback in the past two week, led by energy andbulks products, indicating that the demand for commodities hassoftened somewhat," ANZ economists wrote in a research note.

"Furthermore, we have not seen significant re-stockingactivities in China while the economic momentum accelerated inthe past two months," they added, while maintaining theirforecast that the economy will still expand by 7.6 percent thisyear.

Monday's final HSBC PMI edged up to 50.2 from August's 50.1,hitting a five-month high and showing slight growth, but still alet-down for investors as it was below last week's flash readingof 51.2.

The HSBC survey cited weak domestic orders as being behindthe cooldown, and also showed factories cut jobs for the sixthconsecutive month in September.

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