China PMIs fuel hope economy is stabilising, property still a wild card

Reuters
A firefighter uses a water cannon to clean a statue of late Chinese Chairman Mao Zedong in Shenyang
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A firefighter uses a water cannon to clean a statue of late Chinese Chairman Mao Zedong at Zhongshan Square in Shenyang, Liaoning province March 30, 2013. Picture taken March 30, 2013. REUTERS/Stringer/Files

BEIJING (Reuters) - China's factory and services sectors had their best showings in months in May as demand rebounded, surveys showed, fuelling optimism that its economy may be steadying after a weak start to the year.

"Exports are picking up and the impact of the 'mini stimulus' is gradually being felt," said Tao Wang, an economist at UBS, referring to recent government measures to revive growth.

"We expect this to last in the second and third quarters."

The final HSBC/Markit purchasing managers' index (PMI) rose to 49.4 in May, a four-month high and compared to April's 48.1.

Though the final reading was still under the 50-point level that separates growth in activity from contraction, the improvement nonetheless stirred hopes that the economy is working its way through its prolonged soft patch.

The buoyancy was mirrored by a similar acceleration in growth in the services sector, where a government-released PMI climbed to a six-month high of 55.5, from April's 54.8.

The survey results augur well for China's monthly economic data that will be released from June 8, and gave a fillip to Asian stock markets.

China's economy has had a bumpy ride this year as an under whelming run of data showed an extensive cooldown in investment, retail sales and factory output, feeding concerns that growth could fall further from an 18-month low seen between January and March.

Worried that a broadening downturn would cause unemployment to spike and threaten China's social stability, the government is trying to bolster growth by pump-priming the economy.

Authorities have hastened infrastructure investment, accelerated state spending, and twice lowered the reserve requirements for some banks -- with its most recent reduction made on Friday.

The measures appear to be working.

"Improving conditions in developed markets and further targeted loosening measures announced last week should continue to support the manufacturing sector," said Julian Evans Pritchard from Capital Economics.

"This should give policymakers more leeway to allow a greater cooling of the property sector."

NEAR THE BOTTOM?

A breakdown of Tuesday's PMIs showed domestic and foreign demand is looking up for China.

The services PMI, a barometer for the health of the economy, showed new orders jumped to an eight-month high of 52.7 in May, compared to April's 50.8.

Companies also retained their confidence, with business expectations holding ground at a solid 60.7, compared to April's 61.5.

In the HSBC PMI poll, a turnaround in an export indicator was even more dramatic. The new export orders sub-index leapt to a four-year high of 53.2 in May from April's 48.9.

"The economy is stabilising, but it is too early to say that it has bottomed out, particularly in light of a weaker property sector," said Qu Hongbin, chief economist for China at HSBC.

Up against slowing sales and less generous funding for property developers, China's real estate market has softened this year after last year's stellar performance, causing price growth to drop an 11-month low in April.

As the sector accounts for over 15 percent of China's annual economic output and affects production in over 40 industries, many analysts view the property downturn as one of the biggest risks to the Chinese growth engine this year.

(Reporting by Koh Gui Qing; Editing by Kim Coghill)

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