China Manufacturing Index Hits Two-Year High

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Gu'an, China - June 14, 2016: staff receiving incoming goods, sorting products, and preparing shipments at the Northeast China based Gu'an warehouse and distribution facility

Gu’an, China – June 14, 2016: staff receiving incoming goods, sorting products, and preparing shipments at the Northeast China based Gu’an warehouse and distribution facility

Industrial production appears to be gathering momentum in China, going by a closely-watched gauge of factory activity which last month showed its highest reading in two years.

The National Bureau of Statistics said on Tuesday that the official purchasing managers’ index (PMI) in China gave a reading of 51.2 in October, up from 50.4 in the month before. It was the third month in a row the PMI has come in higher than the 50-point mark, indicating expansion in manufacturing.

The reading for last month, the highest since July 2014, surpassed an average estimate of 50.3 provided by economists in a survey by Bloomberg News.

The latest data, perhaps, serves as another confirmation that the Chinese economy is beginning to stabilize.

“Production and market demand is picking up again, accelerating expansion,” Zhao Qinghe, analyst at NBS, said in a statement.

Reading from a separate PMI computed by Chinese financial magazine Caixin exhibited similar trend as the official data. It rose to 51.2 last month, up from 50.1 in September. The reading was also the highest seen in the private PMI since July 2014.

The Caixin PMI, which is computed in collaboration with market data firm IHS Markit, centers on activities of small companies in China.

“The economy seems to be stabilising for the moment, owing primarily to policies implemented to sustain growth,” Zhong Zhengsheng, an analyst at Caixin, said in a statement. “Supportive policies must be continued, or industrial output may be dragged down by a slowdown in investment.”

The economy of China, a major driver of global growth, has lost considerable momentum in recent years. It grew by 6.9 percent last year – that was the weakest pace seen in about 25 years. The economy is believed to have further slowed in 2016.

The country’s manufacturing sector, which is a major growth driver in the economy, has been confronted with waning demand both at home and abroad. There is also the problem of excess industrial capacity from the infrastructure boom seen in the Asian powerhouse.

Zhao noted in the recent statement that there were still downward pressures on exports and imports as a result of slow recovery in growth across the globe.

Frederic Neumann, economic researcher at HSBC Holdings, told Bloomberg that the new data was an indication of the fact that “a generous stimulus injected earlier this year is still winding itself through the economy.” He noted, however, that this effect may soon end as a result of steps currently being taken by the Chinese government.

Beijing has stepped up plans to cut the huge corporate debt in the country. It wants to make the economy consumer-driven, marking a transition from excessive reliance on debt-driven investment.

Investors are worried that the Chinese government could decide on measures that could tighten liquidity in its drive to cut down corporate debt and arrest decline in the value of yuan.

On Tuesday, the 10-year treasury bond of China bounced back on expectations of possible tightening in liquidity, after previously slumping to its lowest level in a month.

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