3rd LD-Writethru-China Focus: China factory data picks up, long-term outlook positive

China's factory activity picked up slightly in September but remained in contraction as the country's manufacturing sector saw improved, yet still weak, demand, official data showed Thursday.

China's manufacturing purchasing managers' index (PMI) came in at 49.8 in September, up from 49.7 for August, according to data released by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing (CFLP).

A reading above 50 indicates expansion, while that below 50 represents contraction.

The index fell into contraction territory for the fourth time this year, but the slight increase in September was a reversal from two months of decline in a row previously.

Anaemic demand and downward pressure persisted in the manufacturing industry, but there was a recovery in production and market demand, said NBS statistician Zhao Qinghe.

The production sub-index posted 52.3 in September, up from 51.7 in August, showing accelerated growth in production.

The sub-index for new orders came at 50.2, back to expansion territory and up from 49.7 in August, indicating demand has improved slightly.

"The figures showed that pro-growth policies are taking effect, pointing to signs of stabilizing for China's economy," said Zhang Liqun, researcher at the Development Research Center of the State Council, a government think tank.

Chen Zhongtao, analyst with the China Logistics Information Center, observed that manufacturing firms accelerated in reducing their stock of goods in September.

The inventory sub-indices for both raw materials and finished products both declined for a third-consecutive month, according to Thursday's data.

Manufacturing of consumer goods, like food and liquor, continued to improve in September. Zhao said that was partly due to strong demand ahead of the Mid-Autumn Festival and the National Day holiday, which fall near the end of September and at the start of October.

Other indicators also showed continued weakness but a slower pace of contraction in China's manufacturing activity.

The Caixin General China Manufacturing Purchasing Managers' Index (PMI) was 47.2 in September, down from a final reading of 47.3 in August but slightly higher than an earlier flash reading of 47 for September,according to a survey by financial information service provider Markit and sponsored by Caixin Media Co. Ltd.

He Fan, chief economist at Caixin Insight Group, said the manufacturing industry had reached a crucial stage in structural transformation, noting that tepid demand was a main factor behind the weakness.

"The industry was still weak, but the downward movement has slowed somewhat," he said.

Manufacturing is a key driver of China's growth. The country's GDP expanded 7 percent year on year in the first half, in line with the official growth target but still the lowest reading since the second quarter of 2009.

POSITIVE IN THE LONG RUN

China's economy has slowed as the property boom ended and global demand wobbled, however, some new drivers of growth are gradually emerging and there is still huge potential to be tapped by market-oriented reforms, economists said.

While traditional low-cost manufacturing ran out of steam, high-tech manufacturing bucked the trend, Thursday's PMI data showed.

The sub-index for high-tech manufacturing rose to 55.6 in September from 52.2 in August, a record high this year.

The service sector, which now accounts for nearly half of China's GDP, saw faster expansion in business activity against the manufacturing downturn.

The sub-index for the service industry increased to 53 from 52.6 in August, according to the data.

Demand has improved markedly in retail, hotels, express delivery and Internet-related consumption in September, said Cai Jin, CFLP deputy chief.

"Those industries have become sustainable drivers of growth, showing the effect of China's economic transformation," he said.

Those changes, combined with the ongoing urbanization and industrialization process, point to a positive long-term outlook for the economy.

China has huge opportunities of growth in the long run, he said, noting that the potential must be activated by further reforms and opening up.

The government has rolled out a stream of policies to help the economy upgrade to one more reliant on domestic consumption, innovation and private entrepreneurship instead of foreign orders, inefficient investment and cheap labor.

Last month, the State Council unveiled guidelines for state-owned firms, encouraging private capital to enter previously monopolized sectors such as energy and rail.

He believes these reforms will help unleash the growth potential in China by optimizing the investment structure and energizing sectors once dominated by state capital.

Long-term growth will also be boosted by a bilateral investment treaty being negotiated with the United States, which will expand market access for foreign firms in China and force some industries to open up to more competition, he noted.

"China's economy is facing a pressure test now, making it necessary to accelerate reforms and opening up," He said. Endi