China manufacturing tepid in September, small firms struggle

BEIJING (Reuters) - China's manufacturing growth edged up only slightly in September, official data showed on Tuesday, with small firms struggling in the face of overcapacity and weak demand, adding to concerns a nascent economic recovery may be foundering. The official Purchasing Managers' Index (PMI) stood at 51.1 last month from August's 51.0, below expectations in a Reuters poll for a rise to 51.5, which would have been the highest in 17 months. Chinese factories have sent mixed signals on the extent of their latest rebound. A separate manufacturing PMI issued by HSBC on Monday showed manufacturing grew less than expected last month on soft domestic demand. "Although overall manufacturing is stable, development is not balanced," said Zhao Qinghe, senior statistician at the NBS in a comment accompanying the PMI. "The trend towards improvement for large and medium companies is consolidating, but small companies face difficulties," he said, noting overcapacity and weak demand. The official PMI is more weighted towards larger, state-owned companies than the HSBC version. The data showed the sub-index for small firms at 48.4, down from 48.8 the previous month, while that for large companies rose to 52.1 from 51.8. The overall new orders sub-index rose to 52.8 from the previous month's 52.4, with export orders at 50.7 from 50.2. Analysts have warned that China's economic rebound could be short-lived due to its feeble foundation, and the government's promise to avoid knee-jerk policy action that lifts growth in the short run but hurts the economy in the long run. "The question is how sustainable is the recovery," said Haibin Zhu, chief China economist for JP Morgan in Hong Kong. "We are still cautious, we see the recovery peaking in Q3 and slowing in Q4 on a sequential basis." POLICY RESPONSE To shore up activity, China's government has loosened policy at the margins by accelerating infrastructure investment, sustaining spending in public housing, and cutting taxes for small firms. This is unlike 2009, when the government launched a 4 trillion yuan ($653.4 billion) stimulus package that rescued China from the depths of the 2008 global financial crisis, but saddled its economy with debt problems that remain unresolved today. China's government has set a 7.5 percent growth target for the economy in 2013, a goal officials say would be met, but which would still mark the slackest pace of expansion in 23 years for the nation. "Our ANZ China Commodity Index (CCI) also witnessed a significant pullback in the past two week, led by energy and bulks products, indicating that the demand for commodities has softened somewhat," ANZ economists wrote in a research note. "Furthermore, we have not seen significant re-stocking activities in China while the economic momentum accelerated in the past two months," they added, while maintaining their forecast that the economy will still expand by 7.6 percent this year. Monday's final HSBC PMI edged up to 50.2 from August's 50.1, hitting a five-month high and showing slight growth, but still a let-down for investors as it was below last week's flash reading of 51.2. The HSBC survey cited weak domestic orders as being behind the cooldown, and also showed factories cut jobs for the sixth consecutive month in September. ($1 = 6.1220 Chinese yuan) (Reporting by Koh Gui Qing and Jonathan Standing; Editing by Kim Coghill)