Market relief as Chinese manufacturing surges
Leo Lewis Asia Business Correspondent

Chinese manufacturing climbed in August at its fastest pace since the collapse of Lehman Brothers, calming market nerves over the strength of its economic recovery and halting Mondays collapse of Shanghai share prices.

The reports came amid anecdotal evidence that life may be returning to the factory heartlands of eastern China parts of which turned into virtual ghost towns at the end of last year as plants locked their gates and migrant workers headed back to the countryside.

Analysts attributed the revival of manufacturing to the Chinese Governments RMB4 trillion (360 billion) stimulus package and to astronomical levels of bank lending a state-prescribed extension of credit that is expected to total RMB10 trillion by the end of the calendar year.

Andy Rothman, China strategist at CLSA, said that the manufacturing expansion showed that the Chinese recovery was neither too hot nor too cold.

Public and private statements by Chinese officials signal clearly that they are not worried about asset price bubbles, and they are instead concerned about the sustainability of the economic recovery now underway, he said.

The most significant risk to the story, he added, was that the Government could get its management of the big picture right, but miss out on important details.

Others raised a note of caution over the rate of manufacturing expansion, pointing out that any comparison with August 2008 is skewed by the Olympics and government curbs on factory activities around that time. Manufacturing accounts for 40 per cent of the Chinese economy, and some observers question whether growth is sustainable if it relies mainly on domestic demand Chinas middle classes are growing and spending more, but the continuing slump in US and European demand is painful for tens of thousands of small factory owners.

The data came via two separate purchasing managers indexes and prompted several economists to dismiss recent fears over the Chinese growth story as overdone particularly the reaction of domestic stock traders who knocked 22 per cent off the market in August.

The closely-watched China Federation of Logistics and Purchasing survey showed the index rising to a level of 54.0 in August from its July level of 53.3. Anything above the 50.0 mark represents expansion. The signs of healthier growth were tempered by what economists said were fairly unconvincing export numbers: they were growing, but more slowly than they have done since April.

Wensheng Peng, Barclays Capital economist, said that the PMI reports suggested that growth momentum remained healthy, despite the recent concerns on a credit slowdown and stock market retreat.

We maintain our view that inflation risks remain a concern in the medium-term, and a slowdown in the supply of credit at this point would help to reduce the risk of a drastic tightening in 2010, which could lead to a sharp fall in growth and asset prices, he said.