China October factory activity expands at fastest pace in over two years

Reuters: Activity in China’s manufacturing sector expanded at the fastest pace in over two years in October thanks to a construction boom, with smaller firms growing more upbeat, suggesting the world’s second-largest economy is stabilising and getting on steadier footing.

Signs of a more broader-based recovery will be welcomed by the government amid growing views that a housing rally may have peaked. Much of China’s better-than-expected growth this year has been highly reliant on spending by often inefficient state firms as private investment languished.

The official Purchasing Managers’ Index (PMI) stood at 51.2 in October, much stronger than September and the highest reading since July 2014.

Economists had expected a far more modest reading of 50.4, in line with the previous month. Levels above 50 indicate an expansion in activity on a monthly basis.

China’s economy expanded at a steady 6.7% clip in the third quarter and looks set to hit Beijing’s full-year target of 6.5 to 7%, fuelled by stronger government infrastructure spending, record bank lending and a red-hot property market that are adding to a growing pile of debt.

The construction spree has fuelled stronger demand and higher prices for building materials from cement to steel, boosting sales for related companies from engineering firms to property agents. Global construction equipment maker Caterpillar said last week it sees further modest improvement in 2017.

Beijing’s plans to cut excess industrial capacity and factories’ need to replenish low inventories are also buoying prices for commodities such as coal and steel, and boosting profits, said David Qu, a Shanghai-based economist from ANZ. Factory output accelerated in October, with the sub-index rising to 53.3 in October from 52.8 in September.

Total new orders also showed solid improvement, rising to 52.8 from September’s 50.9. But new export orders contracted slightly, pointing to persistent sluggishness in global demand that has weighed on Asia’s export-reliant economies for nearly two years.

A similar business survey showed activity in China’s services sector expanded at the fastest pace since December 2015, with the official reading picking up to 54.0 in October from 53.7 in September.

Both the official factory survey and a private survey by Caixin/Markit showed conditions were improving for smaller and medium-sized Chinese firms, which have struggled for traction as Beijing relies more on large state firms to spur activity.

The Caixin survey showed output expanded at the quickest pace since March 2011.

If the trend does not prove to be a flash in the pan, it may suggest that government efforts to revive weak private investment are starting to pay off. Private investment growth picked up to 4.5% in September after falling to record lows in recent months.

India factory PMI jumps in Oct to highest since Dec 2014

Reuters: Indian factory activity expanded at its fastest pace in almost two years in October, boosted by a surge in output and new orders, but it came alongside a sharp rise in input costs and some pass on to end-consumers, a survey showed.

Tuesday’s data should help reinforce views Asia’s third largest economy is growing at a robust pace, but it could also point to risks of inflation gathering steam and crimping the Reserve Bank of India’s room to ease policy further.

The Nikkei/Markit Manufacturing Purchasing Managers’ Index shot up to 54.4 in October, a 22 month high, from September’s 52.1, marking the biggest monthly jump in almost five years. The PMI has stayed above the 50 level that separates growth from contraction for the tenth straight month.

“The sector looks to be building on the foundation of the implied pick-up in growth in the previous quarter,” said Pollyanna De Lima, economist at survey compiler IHS Markit.

An output sub-index, which measures overall production, was at 57.2 in October, the highest since December 2012, and up sharply from 53.3 in September.

The acceleration in output came after a surge in new orders, a sub-index measuring both domestic and external demand, which mirrored the main PMI and rose to its highest since December 2014.

But the expansion resulted in higher prices.

“Part of the increase in cost burdens was passed on to consumers by way of higher selling prices, which is likely to continue on an upward trend as we head towards the year end,” De Lima said.

Consumer inflation cooled to a 13-month low in September due to moderating food prices, but the PMIs suggest it could soon pick up if the current trend continues.

That will likely affect prospects of further easing from the RBI, which earlier this month surprised markets by cutting its benchmark repo rate 25 basis points to 6.25%.

Economists polled by Reuters a few weeks ago forecast a follow-on rate cut to 6% in the first quarter of 2017.