2nd Ld-Writethru: China Focus: PMI rebound points to improving China economy

Chinese manufacturing bounced back into expansion territory in March after two months of bad news.

The manufacturing purchasing managers' index (PMI), a key measure of factory activity, posted at 50.1 in March, up from 49.9 in February, according to the National Bureau of Statistics (NBS) and the logistics and purchasing federation.

A reading above 50 indicates expansion. The index dropped below 50 in January for the first time since October 2012.

SLOWER, BETTER

The March figure was slightly above market expectations and offers hope that the world's second largest economy is gaining traction.

The improvement was due to the return to work following the New Year holiday, said Zhao Qinghe, NBS statistician. The sub-index for production rose to 52.1 from 51.4 in February.

Recent pro-growth policy had boosted confidence, Zhao said.

The People's Bank of China, the central bank, has cut benchmark interest rates twice since November and lowered the amount of funds banks must hold as reserves, freeing up cash for investment.

On Monday the bank lowered minimum down payments on second homes to prop up the sagging property market.

China's economy grew 7.4 percent in 2014, a 24-year low, described by the government as the "new normal"; slower, but better, growth. The official growth target this year is a record low of around 7 percent.

China has a full "tool kit" at its disposal and will use it if growth nears the lower end of the range, Premier Li Keqiang said in early March.

"We are prepared to step up targeted macro-economic measures to boost market confidence if the slowdown hurts employment and salaries," he said.

President Xi Jinping told the Boao Forum for Asia annual conference on Saturday that the Chinese economy is highly resilient with a lot of potential and enough room to use a host of policy tools.

A TICK IN THE RIGHT DIRECTION

A single uptick, even in an important index, signals very little, especially since the figure was so close to the boom-bust line.

Sub-indices of new orders and new export orders both fell, so downward pressure on manufacturing is still very much present, Zhao said.

The HSBC version of manufacturing PMI in March clocked in at 49.6, down from 50.7 in February. Official PMI covers large enterprises as well as small- and medium-sized enterprises (SMEs), while the HSBC poll is more focused on SMEs.

"The latest data indicate that domestic and foreign demand remains subdued amid weak market conditions, which dampened output growth as a result," analyst Annabel Fiddes said in a release accompanying the HSBC results.

"Company downsizing policies contributed to a further decline in manufacturing employment, with a pace of job shedding the strongest since last summer," she added.

Non-manufacturing PMI, which mainly tracks services and construction, also expanded in March, but at a slower pace. The non-manufacturing index dipped slightly to 53.7 from 53.9.

Services such as retail, catering and air transport traditionally surges during the New Year holiday, and subsequently waned last month. Sub-indices for activity and new orders in the construction industry both rose 2.4 points to 58.9 and 54.7, respectively, probably due to better weather and work on major infrastructure projects picking up speed, Zhao added. Endi