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China's August manufacturing index highest in nearly 2 years

China's official manufacturing activity expanded at its fastest pace in nearly two years in August, data showed today, but private manufacturers posted figures weaker than expected which underlined an economy lack of solid base of fundamental recovery.

The manufacturing Purchasing Managers' Index (PMI), which mainly tracks large state-owned companies, rose to 50.4 last month, according to the National Bureau of Statistics, posting the highest reading since October 2014.

Another Caixin China General Manufacturing PMI survey focused on small and mid-sized firms came in at 50 last month, slightly below July's 50.6 reading. A third survey meanwhile revealed the official services PMI fell to 53.5 in August, down from 53.9 in July.

Economists cheered the fact that all three figures were above 50, which indicates growth.

"This data suggests the forthcoming industrial production and export data for August may improve somewhat," Australia and New Zealand Banking Group said in a research note yesterday. "The improved business conditions should offer some relief for some industries in the course of capacity reduction."

“August is the beginning month of China’s manufacturing peak season, and we expect the official PMI will go higher in the coming months,” said Zhao Qinghe, senior analysts at NBS.

“High-tech and consumer goods are doing well. It’s a positive sign that China’s manufacturing is changing from the low-value added end to the higher one.”

But concerns are spreading as the gains weren’t shared equally, analysts said, as the different performance by firm size clearly reflects a deteriorating business environment for smaller enterprises and the credit risks in this segment are likely to increase.

Among small and mid-sized manufactures, production and total new orders both rose at slower rates while export sales continued to decline in August, Caixin said in a statement, calling current operating conditions "stagnant."

"The big question is where growth momentum on a sequential perspective is going over the next few quarters. There's still a lot of uncertainty," said Zhu Haibin, chief China economist and head of Greater China economic research at JP Morgan, adding that a depreciating renminbi and tepid global demand continue to weigh on Chinese factories.

The stagnant status of economic stability was also partly due to a short-term tightening up of fiscal support, Zhong Zhengsheng, director of macroeconomic analysis at CEBM Group, said in a note after the PMI report.

"China's economy is still facing downturn pressure in aspects such as external demands, property market and production reduction," Zhong said. "A relatively loose fiscal policy is needed to maintain a stabilized economy."

While Chinese government expressed several times that a large scale monetary stimulus is unlikely this year and extra loosening is not needed for now, analysts warned that falling private investment and volatile housing policies should be the next to worry about.


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