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China factory activity up for first time in sour months in August: survey

BEIJING (Reuters) - China's factory activity expanded for the first time in four months in August as domestic demand rebounded, a private survey showed on Monday, the latest sign that the world's second-largest economy may have avoided a sharp slowdown.

The final Markit/HSBC Purchasing Managers' Index (PMI) climbed to 50.1 in August, up sharply from July's 47.7 and in line with last week's flash preliminary reading.

The survey came a day after China's official manufacturing PMI showed factory activity expanded at the fastest pace in more than a year in August with a jump in new orders.

Economists cheered the upbeat data as a sign that China's economy, which has cooled in 12 of the last 14 quarters, is finally steadying.

"We are definitely stabilizing, but it's going to be a pretty weak to flat recovery," said Stephen Green, an economist at Standard Chartered.

Asian shares climbed to a two-week high and the Australian dollar and copper gained after the report.

Modest growth in China's factories should still comfort financial markets, however, offering hope that a run of encouraging data in July was not a fluke.

The official PMI, which came in at 51.0 versus expectations for 50.6, is more weighted towards bigger and state-owned firms, which have easier access to credit and the scale to cope better with downturns than the smaller private firms that form the backbone of the Markit/HSBC survey.

As recently as a month ago, investors had worried that China's economy was slipping into a deeper-than-expected downturn, especially after its money market was hit by an unprecedented cash crunch in June.

But policymakers have stepped in with a series of measures aimed at stabilizing the economy, including quickening railway investment and public housing construction and introducing policies to help smaller companies with financing needs.

EXPORTS STILL WEAK

Senior officials have also been talking up the economy, saying there are clear signs of stabilization emerging and that the government's annual GDP target of 7.5 percent is achievable.

Data for July had showed a pickup in trade and industrial output, while foreign investment into China also quickened, adding to confidence in the economy.

"We expect some upside surprises to China's growth in the coming months," said Qu Hongbin, an HSBC economist, noting that factory activity had picked up on firms rebuilding their stocks and on recent steps taken by authorities to boost activity.

However, any expectations for a strong rebound may be misplaced. As a PMI reading above 50 indicates growth while one below 50 demarcates contraction, the latest Markit/HSBC data suggests August's expansion was only modest.

Indeed, the survey showed new export orders dipping from July to stay well below the 50-point threshold. New orders, which include domestic orders, showed marginal growth by rising to 50.8, albeit a four-month high.

HSBC said lethargic export sales remained an Achilles' heel for China, with factories citing weak U.S. and European demand behind last month's fall in overseas orders.

Other downside factors linger, too. For example, most Chinese firms still face relatively high financing costs, in part due to Beijing's campaign to curb shadow banking. A strong yuan currency is also dampening the trade picture.

Major Chinese retailers are also more downbeat that official figures might suggest.

A Reuters review of first-half earnings showed that more than 20 Chinese companies selling everything from footwear to food were not convinced the economic slowdown had bottomed out, and neither were their traditionally thrifty customers.

Also a concern is that average input costs rose in August for the first time since February on the back of higher raw material prices, HSBC said.

At the same time, slowing growth has put pressure on China's heavily indebted companies and provincial governments, raising concerns that the country's explosion in credit since 2008 could be on the verge of a meltdown.

(Reporting by Koh Gui Qing; Writing by Jonathan Standing; Editing by Kim Coghill)

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