Chinese Manufacturing Expands At Quickest Pace In 18 Months

China’s factories are churning out more products than they have in a year and a half, suggesting that the world’s second largest economy is holding up on domestic and outside demand despite recurring concerns its growth may be slowing.

An HSBC survey showed Thursday that new orders from Chinese factories increased more than economists polled by Bloomberg and Reuters expected, reaching an 18-month high. Exports rose by a similar amount, reaching an eight-month high and easing concerns after weaker-than-expected June export data. Actual output also gained, reaching a 16-month high.

“It was only a matter of time before stronger demand in China's advanced economy export markets passed through to stronger manufacturing output in China,” said Bill Adams, senior international economist for PNC Financial Services Group.

Economists polled by Reuters expect China’s $9.4 trillion economy to lose momentum this year, dipping to 7.4 percent annual growth from 7.7 percent in 2012 and 2013, 9.3 percent in 2011 and 10.4 percent in 2010. China’s housing market, which accounts for about 15 percent of the economy, is slogging through its worst downturn in two years. In addition, looser credit conditions are driving up China’s debt much faster than its earnings.

But for now, China’s growth seems to be meeting the government’s 7.5 percent target for the second quarter, and the most decisive reason is improvements in production, Wei Yao, China economist at French bank Societe Generale, said in a July research note.

“One of the reasons for the more buoyant manufacturing sector is the recovery of external demand,” she said.

Demand from the U.S. and Europe increased 11 percent in the second quarter from the previous year, compared with a 3.6 percent rise in 2013 over the previous year, according to Yao’s data. That’s even as U.S. manufacturing continues to rebound. The survey for U.S. manufacturing showed a dip in July, but output remains high by past standards and consistent with strong growth into the next quarter, according to Capital Economics.

Demand for China's manufactured goods also rose domestically, suggesting that the government’s policies, such as the billions of dollars given to a state-owned bank to lend to shanty-town renovation projects, has successfully spurred growth going into the third quarter, Julian Evans-Pritchard, China economist for Capital Economics, wrote in a note Thursday.

That said, with healthy job and wage growth, Chinese policymakers will likely accept slightly lower growth in the coming years as an unavoidable side-effect of rebalancing the economy, he added.