Recovery signs - China manufacturing index rises on stimulus

Bloomberg reported that a Chinese manufacturing index climbed for a third month, adding to evidence that a CNY 4 trillion stimulus package is pushing the world¡¯s third-biggest economy closer to a recovery.

The China Federation of Logistics and Purchasing said the Purchasing Manager¡¯s Index rose to a seasonally adjusted 49 in February from 45.3 in January. A reading below 50 indicates a contraction.

Stocks rose after output and new orders expanded for the first time in five months. Chinese Premier Mr Wen Jiabao may announce extra measures to reverse the nation¡¯s economic slide at the annual meeting of the National People¡¯s Congress starting in Beijing tomorrow.

Mr Zhang Liqun an economist at the State Council Development and Research Center said ¡°There are more noticeable signs that China¡¯s economy is bottoming out.¡±

The Shanghai Composite Index rose 2.4% as of 10:47 AM local time. While manufacturing contracted for a fifth straight month as the worst financial crisis since the Great Depression cut exports, the PMI is up from a record low of 38.8 in November.

According to Premier Mr Wen surging loans, growth in retail sales in January, and an increase in electricity output and consumption from the middle of last month are signs that government measures have shown ¡°preliminary results.¡±

1. Recovery ¡®Very Likely¡¯

Mr Su Ning central bank Vice Governor said ¡°A recovery in the first half is very likely.¡±

Mr Zhang forecast that Industrial-output growth in January and February may be higher than in November and December. Still, he cautioned that seasonal factors may have boosted the output and new-order indexes, which could fall again.

MR Xing Ziqiang an economist at China International Capital Corp in Beijing said that ¡°The government¡¯s stimulus investment has finally started to take effect. However, a recovery may be short-lived as export demand may get worse in the second half and the outlook for consumption is uncertain. He said that the manufacturing index likely got a boost from factories resuming production after a Chinese Lunar New Year holiday in January.¡±

The output index jumped to 51.2 from 45.5 in January and the new-order index climbed to 50.4 from 45.

2. Export Orders

A measure of export orders rose to 43.4 from 33.7. The employment index rose to 46.1 from 43, the first increase in six months.

According to the China Business Journal and Wen Wei Po newspapers, the premier may unveil a record CMY 950 billion budget deficit for this year to cover government spending on the economy and welfare.

Reuters reported the slowdown has triggered speculation that the government will increase the stimulus package announced in November. An unidentified planning-agency official said today that more will be spent.

Mr Stephen Green Shanghai-based head of China research at Standard Chartered Bank Plc said officials have indicated CNY 8 trillion to CNY 10 trillion of government-sponsored investment is possible,

A separate purchasing managers¡¯ index, released on March 2 by CLSA Asia-Pacific Markets, showed manufacturing contracted for a seventh month in February.

Mr Sun Mingchun an economist at Nomura Holdings Ltd in Hong Kong said ¡°Manufacturing activities may only start to recover from March after more projects break ground in spring. Economic growth may start to pick up from the second quarter onwards.¡±

3. Steel Glut

According to Bank of Nova Scotia a glut of steel at ports in China, the world¡¯s biggest maker of the alloy, shows mills were too quick to boost output on expectations the stimulus package unveiled in November would spur demand.

Steel stockpiles at Shanghai¡¯s main port have jumped 44% this year to 2.1 million tonnes on February 27th the highest since Bloomberg began compiling the data in June 2006. While China¡¯s economy is the only one of the world¡¯s five biggest still expanding, the pace has slowed for six straight quarters. Growth in the three months through December was 6.8% from a year earlier, the smallest gain in seven years. That compares with a 13% expansion for all of 2007.

Tongling Nonferrous Metals Group Co China¡¯s second biggest copper smelter by output said February 27th that profit tumbled last year after prices slumped in the fourth quarter.

4. 20 Million Jobs

China¡¯s government said last month that 20 million migrant workers had lost their jobs because of the slowdown.

Mr Jia Qinglin a member of the Communist Party¡¯s Politburo urged a vigorous employment policy¡± in his speech yesterday at the opening meeting of the Chinese People¡¯s Political Consultative Conference.

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