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Employees work at a shoe factory in Lishui, Zhejiang province, January 24, 2013. (Reuters/Reuters)
Employees work at a shoe factory in Lishui, Zhejiang province, January 24, 2013. (Reuters/Reuters)

China factory growth hits two-year high Add to ...

Chinese manufacturers are riding a wave of optimism, on track to post their busiest month in two years.

This month’s HSBC flash purchasing managers’ index is at a two-year high of 51.9, well above the 50 per cent that indicates industry expansion. It’s climbed for five consecutive months now, adding to the cautious optimism that China’s economy has turned a corner despite continuing threats to its export industry from abroad.

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“Thanks to the continuous gains in new business, manufacturers accelerated production by additional hiring and more purchases. Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months,” wrote HSBC co-head of Asian research Qu Hongbin in a report accompanying the index.

The index is up in almost every indicator: faster output, increase in new export orders, an increase in employment, increasing stocks of purchases and decreasing stocks of finished goods.

China’s gross domestic product grew 7.8 per cent last year, helped along by gentle stimulus spending directed at infrastructure including airports, subway systems and railways. This year’s target officially remains 7.5 per cent, though the state usually sets targets lower than what it expects to actually achieve, and most economists expect it to come in closer to 8 per cent.

The year’s positive start is expected to continue well into the first half, with consumer spending also strengthening and accounting for a larger part of GDP – the beginning of a rebalancing which Chinese policy makers have been promising in recent years.

But that’s not to say it will be all smooth sailing, with analysts still using words like “fragile” to describe the recovery.

“Is the economy faster? Yes. Is it better? That’s a slightly more nuanced question,” said Alistair Thornton, senior China economist with IHS Global Insight. “Fear of a hard landing have been pushed even farther back from the front of people’s minds … but the longer term issues we’ve been talking about for the last couple of years, none of that has changed.”

He warns that without major economic reforms, growth is still dependent on both the recovering property market – which still carries risk of a bubble – and the shadow banking industry, which, while bankrolling much of the building, is still unregulated and seen as high risk.

“At the moment the recovery is really relying on both shadow financing and property but at the same time both property and shadow financing threaten the stability of the Chinese economy. It’s a fine line to walk,” he said.

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