BEIJING Fri Aug 1, 2014 12:28am

China's factories posted their strongest growth in at least 1-1/2 years in July as new orders surged to multi-month highs, two surveys showed on Friday, cementing bets that the is re-gaining momentum after a spate of stimulus measures.

The official Purchasing Managers' Index (PMI) issued by the government climbed to a 27-month high of 51.7 in July, beating forecasts for 51.4.

A separate PMI published by HSBC/Markit also rose to 51.7, its best performance in 18 months.

A reading above 50 indicates an expansion in activity on a monthly basis, and below that a contraction.

Analysts welcomed the data as a sign that the world's second-biggest  is enjoying a revival after a rocky spell prompted authorities to launch a volley of support measures, including increasing bank lending to spur growth.

Now that looser monetary policy is having its intended effect, some analysts questioned the need for more economic stimulus in China, at least in the near term.

"There is no reason in China to be concerned about growth right now," said Julian Evans-Pritchard, an economist at Capital Economics. "It's a good time for policymakers to step back from stimulus and concentrate on reforms."

Both surveys showed that the rebound in manufacturing was led by firmer domestic demand as new orders -- a proxy for domestic and overseas demand -- rose more sharply than new export orders.

The official PMI showed new orders jumped to 53.6 from June's 52.8, the best reading since May 2012. The HSBC/Markit PMI also showed the new orders sub-index jumping nearly two points to 53.3, a level last seen in March 2013.

Worried by a slowdown in the economy in the first quarter, China began easing policy in April by cutting taxes, hastening investment, and lowering the reserve requirement for some banks.

Bank lending, which is controlled by the government, is expected this year to hit levels unseen since the 2008/09 global financial crisis.

All of this should help China sustain its economic recovery, said Qu Hongbin, an analyst at HSBC.

"We expect the cumulative impact of these measures to filter through in the next few months and help consolidate the recovery,” he said.

 

"LIKELY TO MEET GROWTH TARGET"

China's economy has had a rocky spell this year. Growth cooled to an 18-month low of 7.4 percent in the first quarter, and it was only after the flurry of policy support that activity edged back up to 7.5 percent between April and June, in line with the government's 2014 GDP expansion target. And what started as a slowdown largely driven by unsteady foreign and domestic demand and investment has broadened to include a housing downturn, which in recent months has become the biggest threat to the economy. Average home prices fell in May for the first time in two years, while growth in land prices also slowed for the first time in two years in the second quarter. Although a retreat in the once-heated housing market is a welcome for Chinese since home prices are still near record highs, the cooldown is painful for policymakers since the sector accounts for roughly 15 percent of China's economic growth.

Some economists say the economic recovery still hinges on the magnitude of China's pro-growth steps, and whether the government can successfully curb the risks stemming from a cooling property sector. Indeed, in a sign that the recovery may still be patchy, a sub-index for employment in the HSBC/Markit PMI showed employment contracted for the ninth consecutive month in July as some companies laid off workers.

Premier Li Keqiang also said on Thursday that China has to work harder on reforming its economy in the northeastern region, where growth has lagged after regional governments cut state investment to re-orient the Chinese growth engine. [ID:nL4N0Q666Y]

Following three decades of double-digit economic growth, China wants to re-make its maturing economy so that it relies not on investment and exports, but on domestic consumption for sustainable growth.

"Future policy depends on whether the cost of funding in China would continue to fall," said Zhou Hao, an economist at ANZ Bank in Shanghai.

"But it's clear that China's economic growth momentum has increased and it's very likely that this year's 7.5 percent growth target will be met."