China's flash factory purchasing managers index rose in July to its highest level since February, boosted by a pick up in output and signs of improvement in new export orders that offered relief to struggling financial markets.
HSBC's Flash China manufacturing purchasing managers index (PMI) rose to 49.5 in July from 48.2 in June, rising close to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 - the best showing since October 2011.
The new orders sub-index recovered to a three-month high while new export orders gave their best showing since May, although both remained below 50 to suggest demand was still weak. An employment sub-index fell to its lowest level since March 2009.
The flash PMI is the first significant Chinese data point in the third quarter of the year and signals that a sequential improvement in the economy in the second quarter may be broadening as pro-growth government policies aimed at countering the global downturn gain traction.
Still, the HSBC PMI has been below 50 for nine straight months, showing a need for those policies to remain in place.
"This calls for more easing efforts to support growth and jobs," Qu Hongbin, chief China economist with index sponsor, HSBC, said in a statement accompanying the survey.
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"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."
China's economic growth has slowed steadily since 2010 as the intensifying euro area debt crisis has weighed on the global economy.
The PMI, compiled by UK data provider Markit, showed broad improvement across the manufacturing sector with five sub-indexes showing their rate of decline slowing and five showing a change of direction.
The output price sub-index broke above 50 for the first time in five months, a sign that final demand may be lifting factory gate prices, which have been in deflation for four months.
The flash PMI is based on 85-90 percent of total PMI survey responses, set to be published in full around a week later.
The flash PMI steadied the euro and gave Asian shares a modest lift, although equity markets were largely lower on concern Spain is edging closer to needing a financial bailout.
"The data gave a slight boost to markets, but whether such effects are sustainable are doubtful as Europe struggles with its problems," said Hiroyuki Kikukawa, general manager at trading company Nihon Unicom.
Three-month copper rose almost 1 percent and the Australian dollar erased early losses, largely in relief that the PMI suggested economic conditions in China were not worsening.
Flash PMI readings for euro zone manufacturing and services are due for release later on Tuesday. The headline readings are expected to be well below 50, underlining the view that the bloc is slipping into recession.
Jobs crucial
Despite an overall upbeat reaction to China's flash PMI, the report's employment sub-index provided a potential alarm bell. It deteriorated from June, sinking further below 50 and to a 40-month low.
While still just above the readings at the depths of the global financial crisis, when some 20 million Chinese jobs were axed in a few months in late 2008 as global trade ground to a halt, the fall in the employment index is a reminder of the risks in an area to which China's government is most sensitive.
Analysts broadly believe a headline PMI of 48 is consistent with manufacturing output strong enough to deliver the jobs growth that China's government needs to absorb millions of new graduates and rural migrant workers each year.
Jobs are a crucial variable for China's Communist Party leadership, especially in the run-up to its once-a-decade handover of power - a showpiece event scheduled for the autumn that the government is determined to ensure takes place against a backdrop of social stability and economic prosperity.
The 2008 job losses triggered the 4 trillion yuan stimulus programme from Beijing, analysts say.
The government has studiously avoided delivering a carbon copy in response to this slowdown, in large part because it is still cleaning up the consequences of the last programme.
It has been "fine tuning" policies instead, fast-tracking fiscal spending on key projects, cutting the amount of cash banks must keep as reserves to free an estimated 1.2 trillion yuan for lending and, in the space of four weeks in June and July, twice lowering benchmark lending rates.
Analysts polled by Reuters earlier this month expect one more cut to interest rates of 25 basis points and 100 bps of cuts to banks' required reserve ratios by the end of the year.
Relative tightness in China's labour market so far in the worst economic downturn since the global financial crisis has been a function of a degree of economic rebalancing and firms holding on to workers to avoid paying a premium to rehire them when the economy starts to rebound.
Economy to pick up?
Despite six straight quarters of slowing growth to just 7.6 percent in the second quarter versus a year earlier - only just above Beijing's official 7.5 percent target - there are more job vacancies in China than there have been for around a decade.
For Nomura's chief China economist, Zhang Zhiwei, the PMI provided further evidence that a slowdown in China's economy bottomed out in the second quarter of 2012.
"This suggests the effect of policy easing is being transmitted to the economy and reinforces our view that growth has bottomed in Q2 at 7.6 percent and will rebound in Q3 to 8.1 percent," Hong Kong-based Zhang told Reuters.
"We continue to expect policy easing to pick up, with two cuts to the reserve requirement ratio for the rest of 2012. The next cut could happen any time from now. We do not expect further interest rate cut for 2012," Zhang said.
Soft demand from debt-ridden Europe - China's single biggest export market - has piled pressure on the Chinese economy.
Fan Jianping, head of economic forecasting at the State Information Centre, a top government think tank, said in an interview with the China Securities Journal published on Monday that GDP growth of 7 percent - Beijing's target in the five year plan to 2015 - was brisk enough to generate sufficient jobs.
"There won't be any big problems in employment as long as annual average GDP growth reaches 7 percent or above," he said.