Flash PMI flags steady recovery, policy continuity

The initial readings of a widely-watched gauge for China's manufacturing sector indicate acceleration in activities in November, suggesting that the economic growth is steadily recovering and the government is likely to maintain continuity in economic policymaking.

The HSBC Flash China Manufacturing Purchasing Managers' Index, the earliest available indicator of manufacturing sector operating conditions in China, rose to a 13-month high of 50.4 in November from the 49.5 in the previous month, moving above the 50 threshold for the first time since October 2011.

The details show that all major components of the index including output, new orders and export orders are in expansion territory. It is noteworthy that the output index rose to 51.3 from 48.2, reaching a 13-month high, and new export orders also rose above 50 for the first time since April 2012. Meanwhile, both the employment and backlog-of-work indexes contracted at a slower rate. This suggests that the positive signs seen in the September and October activity data were sustained into November, on stabilizing external demand and improving domestic demand.

Industrial production is likely to rise further, and economic growth in the fourth quarter is expected to be around 7.8 percent, up from the 7.4 percent in the third quarter. There are upside risks to our 2013 GDP growth forecast of 7.6 percent but I continue to expect a moderate rather than a sharp rebound. The flash PMI for new orders increased at a slower pace in November than October's 51.2. This reflects the prudent monetary and fiscal policies in 2012, given policymakers' concerns about medium-term inflation risks, a rebound in house prices and fiscal sustainability.

I think continuity, rather than a sudden change in direction, will likely be the key theme of economic policy-making under the new government.

While many observers are busy analyzing the personalities and track records of the new leaders, I think the political system and social-economic conditions are probably more important factors influencing the new leaders' decision making.

Although I expect the new government to pick some of the low-hanging fruit on its reform agenda (eg, measures in resource pricing, tax policy and income distribution) to promote more balanced and sustainable growth, I think an acceleration of structural reforms will only happen over time.

The author is China economist at Barclays Capital Asia. The opinions expressed here are entirely her own.