Demand increase a sign for economic growth

Chinese manufacturing growth is likely to bottom out in September, with new orders going up indicating a sustained improvement in demand, as more supportive policies are awaited to give the economy a boost, according to an HSBC Holdings report.

The manufacturing Purchasing Managers' Index climbed slightly in September to 47.9 from the nine-month low of 47.6 in August, compared with 49.3 in July, the Hong Kong-based bank commented on Saturday.

The figure has stayed below the contraction-expansion line of 50 for 11 consecutive months, but the rate of deterioration has eased marginally recently.

New export orders sharply contracted in September, with a reading that declined to 44.9 from 45.5 in August, according to HSBC. It dragged down the manufacturing output to a 10-month low of 47.3 from 48.2 a month earlier.

New orders are overall going up because of domestic demand.

In the meantime, employee numbers decreased for the seventh month in a row, although the rate of job shedding was relatively modest in September, as a majority of goods producers indicated no change in employment levels, the HSBC report said.

"The sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment," said Qu Hongbin, the chief HSBC economist in China.

"Fiscal measures should play a more important role in the coming months."

The world's second largest economy may suffer the most serious chill in 22 years if the third quarter's year-on-year GDP growth slumps to less than 7.5 percent and the gloomy situation stays the same for the last three months of the year.

Many economists have downgraded their forecasts of the growth rate during the July-to-September period, as demand remained weak and the manufacturing de-inventory may continue.

UBS expected China's GDP growth to slow to 7.3 percent in the third quarter from a year earlier, while the Bank of Communications said the pace of growth may decelerate to less than 7.5 percent.

Considering the downside risks, "China can speed up fiscal spending on infrastructure, public housing and social welfare areas, on top of affording more tax cuts," said HSBC economist Sun Junwei.

The government has accelerated approval for new projects and adopted modest monetary easing since the second quarter. The central bank has cut the benchmark interest rates and reserve requirement ratio twice this year to keep up growth.

"The combination of monetary and fiscal easing should be working through to lift a modest growth recovery from the fourth quarter onward," according to the HSBC report.

Lian Ping, chief economist at the Bank of Communications, said the year-on-year growth rate in the last quarter may rebound to 7.8 percent, supported by a faster increase in industrial output and the effects of the previous policy fine-tuning.

"It is possible to achieve the whole-year target of 7.5 percent and the economy will see a soft landing," Lian said.

UBS expects to see a faster pace of credit and social financing expansion, a continued rebound in property sales, and an acceleration of infrastructure investment in the coming months.

Bank lending is likely to grow by 16.3 percent year-on-year in September, with an increase of long term loans, which can prop up the expansion of investment, it said.