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China’s Factory activity started to improve in July

This good news came from the HSBC flash purchasing managers' index (PMI) which recorded a rise to 49.5 from 48.2 in June. A sub-index showed that manufacturing output jumped to 51.2 in July from 49.3 in June, a nine-month high, the main force boosting the PMI. The new orders index improved to 48.9 in July from 47.2 in June.

The central bank has already cut interest rates in June and July and also cut the amount of money banks must keep in reserve three times since December. It is expected that the consumer price index may decline to less than 2% in July, which will allow the government more room to further loosen policies. A further easing of monetary conditions might start with another reduction in the bank reserve ratio, to inject liquidity into the economy. This plus fiscal measures and the opening up of more sectors to private investment, should help to generate a meaningful improvement in growth in the coming months.

The effects of policy easing are being transmitted to the economy and reinforce our view that growth has bottomed in the second quarter at 7.6 percent and is expected to rebound in the third quarter to 8.1 percent.

 

(Sources: HSBC, Nomura, China Daily)

 

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