New HSBC data on China's manufacturing activity July beat analysts' expectations, with PMI hitting an 18-month high after months of sluggish growth, signaling recovery in the second-half of 2014.

The preliminary reading of the Purchasing Managers Index, jointly released by HSBC Holdings Plc and Markit Ltd on Thursday, rose to 52 from the final June reading of 50.7, beating market estimates of 51.

It was the highest reading since January 2013, and it was also above the 50-point level that separates growth from contraction for the second consecutive month.

"Economic activity continues to improve in July, suggesting that the cumulative impact of mini stimulus measures introduced earlier is still filtering through," said Qu Hongbin, chief economist for China at HSBC. "We expect policymakers to maintain their accommodative stance over the next few months to consolidate the recovery."

Sophii Weng, economist at Standard Chartered in New York, said that the PMI data is good news for exports, but while the figures look good, "recovery is still fragile".

"Further targeted monetary loosening and other measures are likely to support activity," she said. "Yesterday, Premier Li Keqiang pledged to take steps to give more financial support to small, cash-strapped enterprises. This is the fourth time this month that the cabinet has highlighted the issue of financing for small and medium-sized enterprises, and it will likely mean more 'targeted' easing."

The State Council pledged on Wednesday to curb skyrocketing borrowing costs for micro-sized and small businesses, and said more loans should go to these enterprises as well as the service industry, agriculture and projects that safeguard the environment and improve living standards.

A sub-index in the PMI report measuring new orders - which provides a reading of domestic and foreign demand - also reached an 18-month high of 53.7, while the sub-index for output rose to a 16-month high.

Analysts said the continued recovery represents a response to a raft of stimulus measures taken since May, which include reducing the amount of cash that some banks must keep at the central bank as reserves, instructing regional governments to accelerate spending and hastening the construction of railways and public housing.

The effect has been evident since June, when industrial output and fixed asset investment all posted upturns. Those improvements helped accelerate China's GDP growth to 7.5 percent in the second quarter, after a weak first quarter.

Alaistair Chan, a Sydney-based economist with Moody's Analytics Inc, described the latest uptick as a "credit-fueled recovery". Total social financing swelled to 1.97 trillion yuan ($317 billion) in June, the highest level for that month since the lending spree of 2009.

Ann Lee, professor of economics and finance at New York University, is not as optimistic about the uptick: "China already has been suffering from overcapacity, severe pollution, and high debt. If there is no end demand driving the increase in manufacturing, China's policy leaders are only making bad problems worse by postponing the rebalancing," she told China Daily.

China has expedited fiscal spending in recent months, with most of the money going into infrastructure. Appropriations for railway investment have been raised three times this year and now stand at 800 billion yuan. Sixty-four rail projects are on a fast track to approval, probably by late August.

The central bank also provided 1 trillion yuan in relending facilities to China Development Bank for its subsidized housing financing unit.

"With the effects of government measures gradually filtering through, and more positive factors emerging, we expect the industrial sector to maintain steady growth in the second half and the growth momentum to strengthen further," Zheng Lixin, a spokesman for the Ministry of Industry and Information Technology, said at a news conference on Thursday.

Contact the writers at zhengyangpeng@chinadaily.com.cn and amyhe@chinadailyusa.com.

(China Daily USA 07/25/2014 page1)