China factories improve, pro-growth policies may stay

China’s big manufacturers started the year with a slight upturn in production, a survey showed Wednesday, but persistent headwinds to the world’s second-largest economy suggest Beijing’s pro-growth policies will remain in place in the coming months.

China’s official purchasing managers’ index (PMI), inched up to 50.5 in January from 50.3 in December. A level of 50 demarcates expansion from contraction.

The PMI, issued by the National Bureau of Statistics, was stronger than market expectations of 49.5.

“January PMI continued to pick up slightly from the reading of December, indicating that the economic slowdown trend is gradually stabilizing,” Zhang Liqun, a researcher with the Development Research Centre of the State Council, wrote in the official statement.

“The improvement in both new order and stock of purchase sub-indexes reflected the factory production is recovering. But the new export order sub-index dropped last month, showing that the external demand is shrinking and we should pay high attention to the possible hit from external uncertainties.”

The sub-index for new orders rose to 50.4 in January from 49.8 in December, while the sub-index for new export orders fell to 46.9 from December’s 48.6.

The official PMI, which is weighted more towards big state firms, generally paints a rosier picture of Chinese factories than a PMI produced by HSBC, which includes small private firms that have been hit harder by credit curbs and weaker demand.

The official survey was rosier than the HSBC flash PMI, the earliest indicator of China’s industrial activity, which found the manufacturing sector likely shrank for a third successive month in January.

Chinese factories are operating at the weakest level in three years as export demand fades and the once red-hot property sector falters under the weight of government tightening measures to let the pressure out of a possible bubble.

China’s economy, which grew at its weakest pace in two and a half years in the latest quarter, looks to be heading for an even sharper slowdown in early 2012.

The People’s Bank of China is shifting to a looser policy stance to ward off a sharp growth slowdown, although any policy easing looks to be gradual as concerns over inflation linger.

On Nov 30, the central bank announced a cut in the amount of cash that banks must hold as reserves – the first such cut in three years. More cuts are expected in the coming months.