China factory output surprises at 11-month high

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China's big factories were surprisingly busy in March as strong demand quickened the flow of orders, suggesting the economy is stronger than some estimates and possibly reducing the need for an urgent easing in monetary policy.

The National Bureau of Statistics said on Sunday China's official Purchasing Managers' Index (PMI) jumped to an 11-month high of 53.1 in March from 51 in February, comfortably beating analyst forecasts of 50.5.

The unexpectedly strong PMI number may buoy global financial markets on Monday by diminishing investor worries that the world's No. 2 economy is poised for a sharp slowdown, though the data needs to be viewed in context, said Zhang Liqun, a researcher with the Development Research Centre of the State Council.

"Judging from market demand and the state of economic growth, the economy is still likely to slow in future," Zhang said. "We would need to analyse the discrepancy between the PMI and the actual state of the economy.''

Supporting prospects of a turnaround, the new orders sub-index jumped to 55.1 in March from February's 51, while the sub-index for new export orders was up at 51.9, compared with February's 51.1.

China's vast factory sector, which accounted for 40 per cent of its economy in 2010, had steadily lost steam in the past year as tight domestic monetary conditions aggravated waning global demand. Output hit 2-1/2-year lows in January and February.

But other data suggests the pain from China's economic downtrend is spreading across sectors. Chinese industrial firms suffered their first annual drop in profits in January and February for the first time since 2009.

Falling corporate profits have in turn hit China's banks, with four of its biggest state-owned lenders reporting rising delinquent loans during their quarterly results in March.

A flash PMI published by HSBC last week had signalled that Chinese factories were struggling in March as their activity cooled for the fifth straight month and new orders sunk to four-month lows.

A Reuters poll in March showed analysts expect China's central bank to lower the ratio of cash reserves by another 150 basis points this year.

A growing group of economists also believe moderating inflation would give China scope to cut interest rates this year to shore up activity.

PMIs are widely followed because they provide early insight into the health of China's manufacturing sector before official industrial output data is released.