China's factories in strong start to 2012

Chinese workers go about their chores at a textile factory in Huaibei, east China's Anhui province on November 21, 2011.

Story highlights

  • China PMI, an important gauge of factory growth, rose to 50.5 in January
  • The PMI indicated an expansion in industrial activity that confounded forecasts
The Chinese manufacturing sector has made a surprisingly strong start to the year, with domestic orders cushioning the impact of Europe's debt woes, according to an official survey.
The purchasing managers' index, an important gauge of factory growth, rose to 50.5 in January from 50.3 a month earlier. In remaining above 50, the PMI indicated an expansion in industrial activity that confounded forecasts for a decline.
The sub-index measuring export deals fell but Chinese factories noted an increase in their domestic business, as the world's second-largest economy remained robust despite the government's sustained campaign to cool the property sector.
"The Chinese economy has gradually stabilised. The rise in new orders and raw material inventories reflects a recovery for industrial companies," said Zhang Liqun, an analyst with the China Federation of Logistics and Purchasing.
But economists also cautioned against over-interpreting the data because of seasonal distortions. With the Chinese New Year in the final week of January, many factories were closed or running at half-speed for the latter half of the month, and significant adjustments to the data were needed to produce the final PMI figure.
Signs of resilience so far in the Chinese economy have prompted the government to take an incremental approach to policy relaxation rather than a more aggressive stimulus.
Many analysts had predicted that the central bank would cut required reserve ratios in January -- a favoured tool in China for pumping liquidity into the financial system and propping up the economy. But since trimming required reserves in November, the central bank has held its fire and instead adopted more cautious tactics, relying on its open-market operations to inject cash in to the economy.
Some domestic companies, especially property developers, have warned that the economy could deteriorate sharply if the government does not move more boldly.
But key indicators have held up well -- growth slowed just a touch to 8.9 per cent year-on-year in the fourth quarter -- and officials have been determined to avoid a repeat of their massive 2009 stimulus, which fuelled both inflation and bad debts.
Premier Wen Jiabao said on Tuesday that policy can change course quickly if necessary.
"We must sharply observe and accurately judge the momentum of the domestic economy, paying utmost attention to the first signs of problems," he said at a cabinet meeting.
In a report published on Wednesday, Ernst & Young forecast that the Chinese economy would grow 8.1 per cent this year, down from 9.2 per cent last year. However, it also forecast a rebound to more than 9 per cent growth in 2013.
"We would expect to see a significant shift in monetary policy and fiscal policy if growth were to slow significantly," it said.