OREANDA-NEWS. July 03, 2014. Growth in China's manufacturing sector accelerated to a six-month high in June, registering a strong end to the second quarter and an encouraging sign that the economy is further stabilizing.
 
The purchasing managers' index (PMI) rose to 51 last month, up from 50.8 in May and the highest since December, according to data released on Tuesday by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing.
 
A reading above 50 indicates expansion, while a reading below 50 reflects contraction.
 
This is also the fourth monthly rise of the PMI, a widely watched indicator for the health of the world's second largest economy, which registered a weak start at the beginning of the year and stirred much market concern.
 
China's economic growth slipped to 7.4 percent in the January-March period, the lowest quarterly expansion since the third quarter of 2012, but recovery in key indicators in the last three months has provided evidence that the economy may have turned the corner.
 
Apart from the headline PMI, latest data showed industrial businesses saw their profits rise by 9.8 percent from a year ago in the first five months of 2014. China's exports also picked up in May by a 7-percent year-on-year increase, reversing weak performances in previous months.
 
"The continuous rises in PMI indicate that a trend of stable economic growth has generally been established," said Zhang Liqun, a researcher at the Development Research Center of the State Council. "The policy measures aimed to stabilize growth have taken effect," he added.
 
Among major sub-indices in the PMI, the one for new orders, seen by analysts as the most important of all, jumped by 0.5 of a point from a month ago to 52.8 in June, the highest since October 2013.
 
Specifically, the sub-index for new export orders climbed from below the boom-bust line of 50 to 50.3, thanks to improved external demand and government reform measures to support growth and facilitate trade, according to NBS analyst Zhao Qinghe in a research note.
 
The sub-index for production, seen as a foundation for steady PMI growth, edged up 0.2 of a point to 53 in June, marking a second consecutive monthly increase.
 
However, Zhao pointed out that "the forces to shore up the PMI are not balanced", citing lackluster sub-indices for imports and employment.
 
The imports sub-index for June increased slightly by 0.2 to 49.2, a seventh straight month below 50 and pointing to weak demand of the surveyed enterprises to import raw materials from abroad.
 
After a small decline in May, the employment sub-index of the PMI rebounded by 0.4 of a point to 48.6 in June, reflecting prolonged contraction in the job market.
 
The sub-index for business outlook fell by 1.4 from a month earlier to 54.8, but 0.7 of a point higher from the same period last year.
 
STEP UP TARGETED MEASURES
 
Also on Tuesday, British bank HSBC released the final reading for its manufacturing PMI, which came in at 50.7, slightly down from the flash reading of 50.8 but considerably up from May's final of 49.4.
 
Although the HSBC PMI arguably reflects more of the smaller businesses, the June data is in line with the results of the NBS survey.
 
Despite the tiny revision "the trend of improvement in economic activity remains intact", said Julia R Wang, economist for HSBC Greater China, in an email note.
 
However, Wang said it will take time before the recovery becomes more broad-based, as domestic demand "has not firmed nearly enough for this recovery to be sustainable".
 
Wang cited over-capacity problems and slower growth in some sectors due to the property market downturn, and suggested stronger infrastructure investment and accommodative monetary and fiscal policies in the coming months.
 
Following a State Council meeting in May that promised "targeted" monetary and credit easing, relevant government departments have taken moves, including cutting reserve requirement ratios (RRR) for banks whose lending is geared toward small businesses and the farming sector.
 
In a latest move to boost the real economy, the China Banking Regulatory Commission on Monday announced a change in the way it calculates loan-to-deposit ratios for commercial banks.
 
Lu Ting, chief China economist with Bank of America Merrill Lynch, attributed June's upbeat PMI data to improved business sentiment as a result of recent "mini-stimulus" measures.
 
He expects Beijing to step up small-scale measures to deliver the around-7.5-percent annual growth target, but stressed universal measures such as slashing benchmark rates and cutting RRR for all banks are unlikely.
 
Lu forecast year-on-year growth of China's gross domestic product (GDP) in April-June to be either 7.4 percent or 7.5 percent. Wang from the HSBC forecast a 7.3-percent expansion for the second quarter and growth momentum to further accelerate in the rest of the year.
 
Official GDP growth in the second quarter will be released by the NBS on July 17, along with other indicators including industrial output, investment and retail sales.