Chinese industry looking up

Employees inspect newly made products at an automobile components factory in Suining, Sichuan province September 1, 2010.

BEIJING (Reuters) - Chinese manufacturing is regaining some of its usual vigour after slowing in the first half of 2010 as the government reeled in credit and battled to deter speculative property investment.

A rise in HSBC's China Purchasing Managers' Index to a five-month high in September pointed to renewed, though moderate, momentum in the vast industrial sector that is the backbone of China's economy.

The index, which is designed to provide an early indication of conditions, rose to 52.9 from 51.9 in August, mainly reflecting stronger gains in output and new business.

A reading above 50 indicates expansion on the month; a figure below 50 denotes contraction.

"Overall, manufacturing industry is recovering well, with domestic demand reviving and inventories falling," said Sun Wencun, an economist with CITIC Securities in Beijing.

The sub-index for new orders rose to 54.4 in September from 52.7 in August and new export orders climbed back into positive territory after three months below the boom-bust line.

"The recovery is sustainable and demand is rebounding very strongly," said Dong Xian'an, chief macro-economist with Industrial Securities in Beijing:

By contrast, the sub-index for inventories of finished goods came in below the neutral mark of 50 for the second month in a row -- suggesting that companies might have to ramp up production to meet a rise in orders.

MODEST RECOVERY

Still, the PMI remains well below its recent January peak, and Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, struck a note of caution.

"The figure confirms that an earlier inventory correction has ended, as heavy industrial firms restock. But restocking should not be mistaken for a marked bounce in domestic demand," he said.

"Moreover, weaker exports remain a small risk to the outlook. I expect growth will remain steady over the coming several quarters," Simpfendorfer added.

Apart from uncertainty over global demand, headwinds facing the economy include a government crackdown on obsolete, energy-intensive plants, curbs on lending to over-indebted local governments and the spectre of further property curbs.

All this points to an economy that is staging a modest recovery dependent on continued government stimulus, according to economists at Donghai Securities in Beijing.

"Although we don't think the economy will have a deep correction, we are still cautious on the outlook," they said. "Data in the fourth quarter will not be very satisfactory."

Markets barely flinched at the report. Investors generally pay more attention to China's official PMI, which will be released on Friday, a national holiday.

Economists expect this gauge, too, will show a moderate improvement in manufacturing.

A raft of stronger-than-expected output, investment and import data for August had already suggested that the economy was pulling out if its springtime swoon.

Apart from maintaining an ample supply of cheap credit, the government has been ramping up spending on affordable housing and implementing the final stages of the 4 trillion yuan stimulus programme it unveiled in November 2008.

Moreover, household spending remains buoyant, underpinned by sustained income growth.

"Despite uncertainties on growth in global demand, we expect China to rely on continued investment in ongoing infrastructure projects and resilient consumption to grow by around 9 percent in the rest of the year and 2011," according to Qu Hongbin, chief economist for China at HSBC.

(Editing by Ken Wills)