Chinese manufacturing data shows mini-stimulus working: analysts

Chinese factories have expanded their output for the first time in six months according to the respected HSBC/Markit Flash Purchasing Managers Index.

The unexpected surge in activity was supported by a broad-based increase in orders both domestically and from China's main trading partners.

The HSBC Flash PMI, which gives an early indication of the pace of economic activity in China's industrial heartland, expanded from 49.4 points to 50.8 in June.

A reading of more than 50 indicates expanding business activity.

The consensus from market economists for the June PMI had been for another sub-50 reading of 49.7.

Stimulus having an effect

HSBC's chief China economist Qu Hingbin says the result is likely to have been boosted by government policies.

"The improvement is consistent with data suggesting that the authorities' mini-stimulus is filtering through to the real economy," he said.

"We expect policy makers to continue their current path of accommodative policy stance until the recovery is sustained."

TD Securities currency strategists say the reading is consistent with GDP growth of around 7.25-7.5 percent for the year, which is bang on the Chinese government's 7.5 percent target.

The PMI has now added 2.5 points in the past two months, a pace of expansion that has not been since November 2010.

'Hard landing fears overstated'

The TD Securities analysis noted that it is the second consecutive month that the index has diverged from its strong correlation to the iron ore price and that "the odds of a Chinese hard landing were overstated".

"While overcapacity in property and investment is likely to be a headwind, spending on infrastructure projects and the government focus on consumption are unlikely to trigger a growth recession," the analysts argued.

CommSec's chief economist Craig James says the data is positive, but it is worth exercising some caution until the official PMI is released.

"The lift in the 'flash' gauge of Chinese manufacturing activity is encouraging for Australian exporters, but the results warrant some caution due to the small survey sample of firms," he warned.

The Chinese government's PMI, which covers a broader spread of industries including the big state-owned enterprises, will be released next week with the next official GDP reading out on July 16.

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