China's vast manufacturing sector continued its steady recovery last month, fuelling optimism that a brighter future for economic growth awaits than has been suggested by China's gloomy stock market.

The good news was flagged in an influential index yesterday.

The index, compiled through the polling of executives in charge of purchasing materials, rose to a 16-month high as companies continued to benefit from the government's 4-trillion-yuan ($585 billion) stimulus package.

Markets took heart from the fresh signs of continued recovery in the world's third-largest economy.

The benchmark Shanghai Composite Index rose 0.6 percent - or 15.98 points - to 2,683.72 after plunging more than 6 percent to a three-month low the previous day.

"China's equity market has taken a battering in the last few weeks, but the economic data suggests that the recovery remains on track," said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

The purchasing managers' index (PMI), compiled by the China Federation of Logistics and Purchasing (CFLP), rose to the high in August, hitting 54.0 following July's 53.3. Output, new orders, imports and employment were all strong.

The PMI is designed to give a timely snapshot of business conditions. A reading above the watershed of 50 indicates activity is expanding. A number smaller than 50 suggests contraction.

"The reading of the August index, which continued to rise slightly above 50, indicates the momentum of the country's economy will continue," said Zhang Liqun, a researcher with the Development Research Center of the State Council.

However, the government should closely watch changes in the PMI because uncertainty exists over the economic recovery, he said.

Chinese Premier Wen Jiabao yesterday said China will not change the orientation of its stimulus initiatives because the country is at a critical stage in its economic recovery.

During his meeting with World Bank President Robert Zoellick, Wen said the Chinese government would continue to pursue its proactive fiscal policy and a moderately easy monetary policy.

"We will not change the orientation of our policy," Premier Wen said.

The PMI hit a record low of 38.8 in November when the economy was slumping because of the collapse of external demand for Chinese exports and the downturn in the domestic property market.

"The Chinese manufacturing sector is likely to see further improvements in the coming months, adding fuel to the overall growth recovery," Qu Hongbin, chief China economist with HSBC in Hong Kong, said in a statement.

Eric Fishwick, chief Asian economist at brokers CLSA, said the gain in the PMI will be interpreted positively by markets that had been jittery about credit tightening.

He said he suspected that actual economic growth would prove resilient to the Chinese government's attempts to slow loan growth.

"There is little evidence that policymakers see the pace of fixed asset investment growth as problematic per se," Fishwick said.

"I would, therefore, expect manufacturing indicators, including the purchasing managers indices, to remain well supported in the coming months."

"The August PMI points to a V-shaped recovery of the manufacturing sector," said Sun Mingchun, an economist with Nomura in Hong Kong.

"Hence, we predict that China's GDP growth will reach 8.1 percent this year and may even accelerate to 10 percent in 2010."

Source: China Daily