Confidence in China’s manufacturing sector rose sharply above expectations in December, with the widely followed purchasing managers’ index (PMI) reaching an almost four-year high.
Stocks across Asia gained in response to the surprise increase. The Shanghai Stock Exchange Composite Index rose by 1.04 per cent on Tuesday, while the Hang Seng – a measure of the 50 largest companies on the Hong Kong exchange – rose by 0.68 per cent.
Manufacturing PMI rose by one percentage point in December to 51.9, according to data compiler Caixin.
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Production reached its highest growth in almost six years, with new orders driving the rise. Output growth increased to an almost six year high on the back of strong domestic demand as net exports remained unchanged.
New work raised the need for inputs, pushing up stocks and inventories.
Zhengsheng Zhong, director of macroeconomic analysis at research firm CEBM Group, said: “The Chinese manufacturing economy continued to improve in December, with the majority of sub-indices looking optimistic. However, it is still to be seen if the stabilization of the economy is consolidated due to uncertainties in whether restocking and consumer price rises can be sustainable.”
Ipek Ozkardeskaya, an analyst at London Capital Group, said: “Economic activity in China is expected to expand at a higher pace moving into the Chinese New Year, which is due earlier this year.”
China’s GDP has grown steadily at an annual rate of 6.7 per cent over the last three quarters according to government data – above the lower bound target rate of 6.5 per cent.
While many economists doubt the accuracy of China’s heavily symbolic GDP data, proxies of manufacturing production such as electricity production have also shown recent increases.
Investors will be keenly watching the indicator to see if the continued improvement in Chinese manufacturing over the course of 2016 will be sustained. China also faces the prospect of a tougher stance – and potentially tariffs – from US President-elect Donald Trump.
Trump attacked China's trade policy once more late last night on Twitter, saying it was "totally one-sided".
A slowdown in the world’s second largest economy could have a serious impact on markets around the world. Influential figures such as Bank of England governor Mark Carney have already warned Chinese growth is over-reliant on a credit boom, making it a major risk to the UK economy.