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By Jason Simpkins
Chinese stocks surged yesterday (Monday) on signs that the nation's manufacturing sector is strengthening and government stimulus measures are gaining traction.
The Shanghai Composite Index, China's benchmark index, rose 3.4% to 2,721.28 yesterday and Hong Kong's Hang Seng Index surged 3.9% to 18,888.59.
The main motivation behind the gains was a jump in manufacturing activity, which increased for a third straight month in May. China's Purchasing Manager's Index (PMI), a survey of more than 700 manufacturers, stood at 53.1% in May. That marks the third consecutive month of expansion for China's manufacturing sector. The PMI reached 53.3% in April.
The rebound in manufacturing shows that while foreign demand for Chinese goods may still be sluggish, domestic demand is adequate enough to promote growth. Beijing launched an ambitious $585 billion stimulus package last year, hoping to prop up domestic demand. The manufacturing data suggests that stimulus is having an effect and a recovery may be underway in the world's third-largest economy.
CLSA, a Hong Kong-based Asia-Pacific brokerage firm, yesterday released its own version of China's PMI, the Financial Times reported. That index rose to 51.2 in May from 50.1 in April. The CLSA index has now risen for two straight months.
"For the first time the PMI shows genuine evidence that policy really is gaining traction, While the Export Orders Index remained just below the 50 neutral threshold, total orders jumped to the highest level for ten months," said Eric Fishwick, head of economic research at CLSA. "The rate of destocking increased in May, encouraging in light of some anecdotal suggestions that production is running ahead of orders. In aggregate the reverse is true, pointing to sustained output growth in months to come."
Indeed, there is mounting evidence of an economic recovery throughout the Asia-Pacific region. Factory output in Japan rose 5.2% in April, the biggest jump since 1953. The Australian Performance of Manufacturing Index rose to 37.5 points in May, its highest level in seven months, the Australian Industry Group reported.
Meanwhile, manufacturing activity in India posted its second consecutive month of expansion in May. The Markit Purchasing Managers' Index rose to 55.7 in May, its highest level in eight months.
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