2nd LD Writethru-China Focus: China's manufacturing activity expands in August

Activity in China's manufacturing sector expanded in August due to a recovery in market demand and a rebound in production, official data showed Thursday.

The purchasing managers' index (PMI) came in at 50.4 in August, rising from 49.9 in July and beating the market expectation of 49.8, according to the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing.

A reading above 50 indicates expansion, while a reading below 50 reflects contraction.

NBS statistician Zhao Qinghe said both production and demand picked up in August.

The sub-index measuring production stood at 52.6, up 0.5 percentage points from July and also the highest level since the start of the year.

The sub-index for new orders settled at 51.3, 0.9 percentage points higher than the previous month.

Company confidence generally improved in August, especially in high-tech manufacturing and consumer goods. Business expectation indices for the two sectors both rose to over 60 percent, showing optimism on future growth.

However, Zhao noted that China still faces mounting export pressures as global economic growth remains tepid.

The sub-index for new export orders was 49.7, up from 49 in July but still in contraction.

In U.S. dollar-terms, China's exports contracted 4.4 percent year on year in July, a slight improvement on June's 4.8 percent contraction.

More than 40 percent of companies complained about capital strains. Higher labor and logistics costs also added pressures to operations, Zhao said.

The PMI survey showed larger companies were outperforming smaller ones, reflecting imbalances in the economy. A sub-index for smaller firms stood at 47.4, while one for larger companies was 51.8.

"China's economy showed signs of resilience in August, as the main business surveys showed the manufacturing sector between stability and moderate expansion," said Bloomberg Chief Asia Economist Tom Orlik.

"Policy has already started to swing away from all-out stimulus, toward a slightly greater focus on containing financial risks. Today's data should provide policymakers with cover to continue that trend."

The Caixin General China Manufacturing Purchasing Managers' Index, an indicator of manufacturing activity based on a private survey, dropped to 50 in August from 50.6 in July.

"Downward pressure on China's economy remains, and government support to stabilize growth must continue," said Zhong Zhengsheng, a macroeconomic analyst at CEBM Group, a subsidiary of Caixin.

NBS data released Thursday showed that activity in the non-manufacturing industry continued to expand in August, but at a slightly slower pace than in the previous month.

The official non-manufacturing Purchasing Managers' Index stood at 53.5 in August, down from 53.9 in July but above the 50-point mark that separates growth from contraction.

China is counting on growth in services to offset weakness in manufacturing and exports. The economy is widely expected to follow an L-shaped path as downward pressure continues and new growth momentum is yet to pick up.

China's GDP expanded 6.7 percent in the second quarter, the lowest growth rate since the global financial crisis in early 2009 but still within the government's target range of 6.5-7 percent for 2016. Endi