The index, which came in at a five-month high although still in contraction territory, lifted Chinese stocks and gave a slight boost to battered European markets Tuesday morning.
It rose to 49.5 from June’s 48.2, lifted by the Manufacturing Output Index’s jump to a nine-month high of 51.2 from June’s 49.3.
New orders and new export orders contracted at a slower rate while backlogs of work showed an expansion, changing their direction. The quantity of purchases also expanded while stocks of purchases contracted at a slower rate.
The employment component of the index, however, contracted at a faster rate.
“The employment index is at a 40-month low,” Alex Hamilton, China economist at Markit, which compiles the PMI survey for HSBC, told Emerging Markets.
“It shows firms remain hesitant in committing to hiring, given the uncertain economic outlook. I would think that would be a particular worry for authorities moving into political change at the end of the year,” Hamilton added.
China’s Communist Party is due to hold its national congress sometime in the autumn of this year to elect its 18th Central Committee.
EMPLOYMENT DATA LAG
Hamilton said employment data tend to lag those on output and new orders and that if those continue to improve, the jobs component of the index will rise too.
An analyst told Emerging Markets on Monday that the markets will watch the data with more eagerness than usual, especially in the light of the recent doubts over the reliability of the Chinese official gross domestic product (GDP) figures.
The China flash PMI data pushed up the Australian dollar, which strengthened above its 200-day moving average against the US dollar in Asian trade on Tuesday.
“The outperformance of the Australian dollar in the Asian trading session has been mainly driven by building investor confidence over the outlook for the Chinese economy,” Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ wrote in a note to clients.
“That being said, with the index still below the 50-level in July, it is consistent with demand conditions remaining weak while there were signs that employment conditions are coming under increasing pressure from the economic slowdown,” Hardman added.
Hongbin Qu, chief economist for China at HSBC said in the press release accompanying the flash PMI data that the index “picked up modestly.”
But with demand still weak and jobs under pressure, more easing efforts will be needed, Qu added.
“We believe the fast-falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through,” he said.
Analysts told Emerging Markets that the fact that Chinese banks’ loans rose in May and June shows that the easing measures taken so far – cuts in banks’ reserve requirement ratio and in interest rates – are beginning to work and they will lift the economy.