The purchasing managers’ index (PMI) figure, published by the National Bureau of Statistics, rose to 51 in August from 50.3 in July. That was its highest level since April last year and exceeded market expectations for a 50.6 reading.
The PMI strengthened for the second straight month and comes as other recent data have spurred optimism a slowdown in the economy may have been stemmed.
Beijing has stepped up efforts to prevent a sharp economic slowdown by quickening railway investment and public housing construction and introducing a series of measures to help smaller companies, which could sustain the revival of internal demand in the coming months.
“We are seeing clearer signs of economic conditions improving,” said Haibin Zhu, chief China economist at JP Morgan in Hong Kong.
“One of the reasons is the lagging effect of credit growth earlier in the year, while the second is the recent shift in the policy stance and more concrete policy announcement.”
As one of the first leading indicators gauging economic momentum, the improved reading could bode well for other August data, further confirming a stabilizing trend in the economy.
The August subindex for new orders climbed 1.8 percentage points from the previous month to 52.4. Import orders were strong, as were raw material input prices, pointing to improving domestic demand. Export orders were slightly better, while employment inched higher.
It added that domestic demand had improved and that in turn gave a boost to imports.
“This was better than expected, and it reflects a rise in domestic demand,” Bank of America Merrill Lynch economist Lu Ting said. “We could have an upside surprise in economic growth in the third quarter—it could be better than our forecast of 7.6% [on year].”
It wasn’t all good news, however. The National Bureau of Statistics said big companies—many of them state enterprises—did better than smaller ones. More government support is needed for these companies, it added.
This is reflected in a competing gauge of manufacturing activity compiled by HSBC. Its reading of manufacturing activity, came in at 50.1 in August, barely in expansion territory. But the measure, which gives a heavier weighting to smaller, private companies showed an improvement during the month from the 47.7 recorded in July.
Despite an uptick in manufacturing activity, analysts cautioned that a strong rebound in the economy appears unlikely because most Chinese firms still face relatively high financing costs, in part due to Beijing’s campaign to curb shadow banking.
An uncertain export environment and a strong yuan currency are also risk factors.