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China factory growth quickens to 4-month high but confidence subdued

An employee works on an assembly line producing automobiles at a factory in Qingdao, Shandong Province, China, in this file photo.


Growth in China's manufacturing sector unexpectedly picked up to a four-month high in December as factories cranked up production to meet a surge in new orders, a private business survey showed on Tuesday.

The reading suggested surprising resilience in the world's second-largest economy at the end of the year, though it was somewhat at odds with a much larger official survey on Sunday that pointed to a slight loss of momentum.

The Caixin/Markit Manufacturing Purchasing Manager's Index (PMI) rose to 51.5 last month, from 50.8 in November, and far outpacing economists' expectations for a slight dip to 50.6.

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The 50-mark divides expansion from contraction on a monthly basis.

Analysts have expected some softening in China's manufacturing activity as a punishing crackdown on air pollution, a cooling property market and higher borrowing costs all start to weigh on the world's second-largest economy.

That view appeared to be borne out by the official data at the weekend which suggested that production expanded in December at a slightly more modest pace.

But Caixin's findings showed output grew at the fastest pace in three months, bolstered by improving demand.

Total new orders at home and from abroad rose at the strongest pace since August, with the sub-index jumping to 53.0 in December from 51.8 the previous month.

The Caixin survey tends to focus on small and mid-sized firms which are believed to be more export-oriented.

While the official data pointed to a wobble in production, it also showed a pickup in overseas orders which should help support China's exporters in the next few months.

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However, despite the increase in new work, the Caixin survey indicated manufacturers continued to shed staff in December and input costs continued to rise sharply, largely due to higher prices for raw materials.

Companies were able to pass on some of those cost increases to customers, suggesting broader inflationary pressures may intensify in China this year. The official data pointed to even stronger price rises.

China's vast industrial sector has reported strong earnings growth this year thanks to a year-long construction boom that has fuelled demand and prices for building materials.

But government measures to tame rising housing prices and high debt levels are starting to weigh on property investment, while the boost from a massive infrastructure spree is starting to fade.

Beijing's war on winter smog has also disrupted manufacturing activity.

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Some steel mills, smelters and factories in the north have been forced to curtail or halt production, though plants in other parts of the country may be ramping up production to fill the shortfall and gain more market share.

Despite the pickups in output and new orders, however, the Caixin survey showed business confidence in the 12-month outlook remained weak by historical standards. Respondents cited forecasts of relatively subdued client demand and changes to national policies, though no more details were provided.

"Manufacturing operating conditions improved in December, reinforcing the notion that economic growth has stabilized in 2017 and has even performed better than expected," Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a note accompanying the Caixin release.

"However, we should not underestimate downward pressure on growth due to tightening monetary policy and strengthening oversight on local government financing."

Analysts have widely expected China will report slightly cooler economic growth in the fourth quarter after a forecast-beating 6.9 percent expansion in the first nine months of the year, supported by the construction boom and robust exports.

Sources have told Reuters that Chinese leaders are likely to stick with a growth target of around 6.5 percent for 2018, the same as last year, even as they ratchet up efforts to prevent a destabilising build-up of debt.

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