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China growth resumes following new year

Thursday, March 21 07:24:47

Growth in China's vast manufacturing sector picked up in March after a holiday dip, a preliminary survey of factory managers showed today, pointing towards solid but not spectacular first-quarter growth in the world's second-largest economy.

The HSBC Purchasing Managers' Index for March revived to 51.7 in March from 50.4 in February, but remained below a two-year high of 52.3 reached at the beginning of the year.

The pullback in February had raised concerns in financial markets that China's recovery was losing steam. Indeed, official data earlier in March suggested the economy had started 2013 with only tepid growth after a burst in the fourth quarter.

Economists' opinions were mixed on how much recovery momentum would be carried into the second quarter, with some pointing to weak commodity demand while others took comfort in the stronger March showing.

"Current readings around the 50 points level seem to us to be consistent with GDP growth close to 8 percent year-on-year, and investors should not expect numbers close to the 55 points readings from the past when GDP growth was firmer," wrote Dariusz Kowalczyk of Credit Agricole-CIB in Hong Kong.

"We are sanguine about China beating its GDP growth target."

The perk-up in March comes after the long Lunar New Year holiday that closed most of China's factories for at least two weeks in February. The holiday falls in either January or February, distorting underlying trends early in the year.

A sub-index measuring factory output rose in March to 52.8, recovering from a dip in February, HSBC said.

Sub-indexes tracking new orders and new export orders both showed the pace of growth accelerating, indicating that manufacturing output should be supported in the near future.

The March reading "implies that the Chinese economy is still on track for gradual growth recovery. Inflation remains well behaved, leaving room for Beijing to keep policy relatively accommodative in a bid to sustain growth recovery," wrote HSBC's China economist Qu Hongbin.

A reading above 50 indicates the pace of activity increased from the previous month.

That could belie weak January and February electricity output figures, cited by Capital Economics economists Mark Williams and Qinwei Wang, who conclude that first quarter growth is likely to be slower than the fourth quarter's 7.9 percent.

They also looked at a drop in domestic freight volumes, but conceded construction activity and port volumes have improved.

Taken together, the signs are that "economic growth is slowing in the current quarter, much sooner than most had expected," Williams and Wang concluded.

"The latest data suggest that growth in (quarter-on-quarter) terms has dropped back to the pace seen in mid-2012, before the policy-driven rebound took effect."

Asia's top companies, especially those in the export engines of China, Japan and South Korea, are less optimistic about their business outlooks as global demand remains sluggish, the latest quarterly Thomson Reuters/INSEAD Asia Business Sentiment Survey showed this week.

Snapshots of the diverse economy present a mixed picture.

A recent trip to Shanxi, China's coal capital, revealed full stockyards and pessimistic managers, said roving analyst Nicholas Zhu of SDR Consulting.

"That shows downstream demand is relatively poor," he said.

But a separate trip to agriculture-dependent Sichuan province painted a different picture.

"I saw a lot of investment, not super-strong but still coming along," Zhu added.

Shanghai copper futures are flat through the fourth quarter of 2013, implying that traders see relatively slack demand for the building material in coming months.

"Domestic demand is definitely not as strong as it used to be. Demand will climb but not as steeply as before," said analyst Fang Junfeng of China International Futures Co., one of the nation's biggest futures brokers.

Other PMI sub-indexes also pointed to an economy humming along but unlikely to deliver the blistering pace of growth seen in previous years.

Sub-indexes measuring both input and output prices fell, indicating overcapacity upstream and soft demand. That's in line with over a year of falling producer prices, although official data has shown some signs that the decline is bottoming out. An employment sub-index also softened.

China's export sector was badly hit in 2012 by a slump in demand from Europe and Japan. ( C) Reuters