Strong manufacturing activity points to improving growth momentum

China's manufacturing activity quickened to the highest level in more than two years in July, reinforcing signs that the economy is firming up on government support policies.

The purchasing managers' index rose to 51.7 in July, up from 51 in June, according to data released on Friday 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.

The stronger-than-expected growth marked the fifth monthly recovery of the PMI, a widely watched indicator for the health of the world's second-largest economy.

The data is also in line with the HSBC final PMI reading of 51.7, which better reflects the performance of smaller businesses.

NBS statistician Zhao Qinghe attributed the strength to government growth-stabilizing policies and the improving external environment, which helped boost production and new orders.

In breakdown, the production sub-index came in at 54.2, the highest level yet in 2014, while the sub-index for new orders raced to its highest level since May 2012.

In particular, the PMI for small enterprises grew to 50.1 in July, the first time it went above the 50-point threshold since April 2012.

"The improving indices indicate economic growth will steadily gain strength," noted Zhang Liqun, an economist at the Development Research Center of the State Council.

After a shaky start this year, Chinese policymakers have pinned hopes on accelerating investment on railways and infrastructure, quickening fiscal spending, and selectively easing monetary policies to support faltering growth.

In the first six months, total national fiscal spending expanded 15.8 percent from a year ago to 6.92 trillion yuan (1.12 trillion U.S. dollars). For June alone, the figure surged 26.1 percent to 1.65 trillion yuan.

Along with the proactive fiscal policy, more focus has been put on optimizing credit structure by giving more financing support to small business against the backdrop of prudent monetary policy and reasonable credit growth.

Helped in part by these efforts, China's economic growth showed recovery signs in the second quarter, accelerating to 7.5 percent from the 7.4-percent expansion in first quarter.

But Zhao cautioned that the foundation for recovery in the real economy is not solid enough as small and micro-sized enterprises still either have difficulties accessing funds or face high financing costs.

To further ease financing costs in the real economy, a State Council meeting last month outlined ten specific measures, including more support to small businesses through relending, cutting redundant procedures, and cleaning up unnecessary charges to give companies in targeted sectors easier access to money.

Looking into the latter half of the year, Chinese authorities have signalled that they will continue to rely on targeted macro policies to ensure economic growth stays within a proper range.

"If the official PMI can maintain the pace above 51.5 in August and September, China's GDP growth could be maintained at 7.5 percent in the third quarter," said Bank of America Merrill Lynch in a research note.