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China's Rebound Eases Slump Fears - WSJ.com

SINGAPORE—China's manufacturing rebounded in August, countering weakness in some other Asian economies and suggesting the region's growth won't slow sharply later this year.
Data for two purchasing managers' indexes in China showed that factory activity grew in China, set to be the world's second-biggest economy this year, and outweighed declines in South Korea and Taiwan, where the West's sluggish recovery weighed on exporters.
Markets "will put more faith in the Chinese PMI data than some of those small regionals," said Frederic Neumann, co-head of Asian economic research for HSBC bank, which issues monthly PMI indexes for a number of countries.
China "is the elephant in the room and as long as it ekes out growth, and it does seem as if China has stabilized," Mr. Neumann said. Meanwhile, slower growth in smaller economies "will be taken as noise within the broader story, which is that Asia is not going to double-dip."
The official China PMI rose to 51.7 from 51.2 in July, its first rise in four months, the China Federation of Purchasing & Logistics said. A reading above 50 indicates an expansion in manufacturing activity, while a reading below 50 indicates contraction.
HSBC's China PMI rebounded to a three-month high of 51.9 from 49.4. That means manufacturing returned to growth after a slight contraction in July, although the index remains almost six points below its level at the start of the year.
The data "reconfirmed our long-held view that China is moderating rather than melting down," said Hongbin Qu, HSBC's chief economist for China and co-head of Asian economic research.
"Domestic demand will be resilient," driving economic growth at about a 9% annual rate in the second half of this year and in 2011, Mr. Qu said, "while external demand is more likely to turn worse in the coming months."
Moreover, Nomura economists noted that components of the index measuring forward-looking new orders and new export orders rose.
"These two components appear stronger than the seasonality suggests, pointing to an acceleration in manufacturing activity ahead," Nomura said in a note to investors.
Data from elsewhere in Asia-Pacific painted a less optimistic picture.
In Australia, an index released by the Australian Industry Group-PricewaterhouseCoopers fell 2.7 points from July, to 51.7.
"Election uncertainty, together with intense import competition and other ongoing impacts of a strong Australian dollar, is generating headwinds for manufacturers," said Australian Industry Group Chief Executive Heather Ridout.
Still, that was offset as Australia's gross domestic product grew more than expected in the second quarter, by 1.2% from the previous three months and by 3.3% from the same period last year. Most importantly, the growth was broadly based, alleviating concerns that the mining sector alone is powering the Australian economy.
In Taiwan, manufacturing contracted for the first time in 18 months on weaker business conditions, mainly in the technology sector. HSBC's PMI for Taiwan fell to 49.2 in August from 50.5 in July.
"An increasingly murky external environment is putting a heavier onus on the island's domestic-demand engine to deliver in the second half of 2010," said HSBC economist Donna Kwok, though she expressed confidence that domestic demand would indeed prove resilient.
South Korea's index showed the sharpest decline, falling to 50.9 the weakest in 17 months from 53.2.
"Amid growing concern over the global economic recovery, Korea's growth engine let off a little steam in August," HSBC economist Song Yi Kim said.
The lower reading for Australia could be seen as a delayed follow-through from China's July dip in manufacturing, HSBC's Neumann said.
In contrast, the declines in Korea and Taiwan show how much more exposed those economies are to the West, where growth remains sluggish, than is China, which has more capacity to generate growth internally.
Indeed, other data Wednesday showed Korea's exports rising a lower-than-expected 29.6% on year in July, sharply shrinking the country's trade surplus.
India's August HSBC PMI slipped to 57.25 from 57.6 in July.
"India's economy is showing no signs of cooling despite a partial withdrawal in fiscal and monetary stimulus," HSBC's Mr. Neumann said. "We think there is plenty of fire power still to come from industry, even though (year-on-year) growth may not look as stellar as in the recent past."

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