China and India lead the way in Asia and UK perks up

Manufacturing growth in China and India powered ahead last month and UK industry also picked up steam, data showed on Monday, countering sluggishness in the U.S. economy and a faltering Japanese recovery.

Two surveys of Chinese executives showed broad-based strength in the manufacturing sector of the world's second-largest economy and helped boost Asian shares outside Japan by two percent.

The official purchasing managers' index (PMI) rose to a six-month high in October of 54.7 from 53.8 in September, easily beating market forecasts of 52.9.

A figure above 50 denotes expansion; a reading below 50 indicates contraction.

Equivalent surveys from Europe are due on Tuesday but Britain's PMI showed manufacturing growth picked up pace last month for the first time since March.

Flash October figures for Germany, released last month, also gave a strong reading although much of Europe remains mired in debt and poised to cut public spending to deal with it -- a move that will crimp economic growth going forward.

The unexpected rise in Britain's index to 54.9 will increase doubts that the Bank of England will soon embark on more quantitative easing. It followed official data last week that showed the UK economy grew a surprisingly strong 0.8 percent in the third quarter from the second.

Investors are in little doubt, however, that the Federal Reserve, which holds a policy meeting on Tuesday and Wednesday, is poised to inject more money into a struggling U.S. economy.

The United States reported on Friday that its economy grew at a tepid 2.0 percent annualized rate in the third quarter, reinforcing expectations the Fed will agree this week to embark on a new program of bond purchases.

U.S. October ISM data -- which match the PMIs -- is due later in the day and forecast to edge down.

"Quantitative easing is what the market's focused on. That'll lift all boats," said James Holt, a Sydney-based investment specialist at BlackRock, the world's biggest fund manager.

Chinese, Indian Strength

Manufacturing in India -- Asia's other emerging powerhouse -- put in a performance every bit as strong as China's.

The HSBC Markit PMI for India, Asia's third-largest economy, rose to 57.2 in October from 55.1 in September.

"The manufacturing sector remains supported by strong local consumption growth, and growing employment suggests that domestic demand will remain robust," Frederic Neumann, co-head of Asian Economics Research at HSBC, said.

The strength of China's official PMI was especially striking because the index normally heads down in October, said Yu Song and Helen Qiao, economists at Goldman Sachs.

"The fact that the PMI went up despite this seasonal bias suggests real activity growth was likely to have been exceedingly strong in October," they said in a note.

The survey showed manufacturers continued to run down stocks last month to meet rising domestic orders. "These readings bode well for a recovery of output in coming months," Ting Lu at Bank of America Merrill Lynch told clients.

A companion PMI produced by Markit for HSBC painted a similar picture, rising to 54.8 from 52.9 -- one of the largest month-on-month rises in the history of the survey.

Calling the official PMI one of the best leading indicators of the economy, Lu said the October report supported his forecast of 9.3 percent year-on-year growth in gross domestic product in the fourth quarter and 10.3 percent for all of 2010.

Not All Rosy in Asia

Not all the economic news from Asia was upbeat.

The South Korean manufacturing sector shrank for the second month in a row as the HSBC/Markit PMI fell to 46.75 in October, the lowest since February 2009, from 48.8 in September.

New export orders also fell below the boom-bust line of 50 for the first time since February 2009.

But actual exports from Asia's fourth-largest economy rose 29.9 percent in October from the same month last year.

"It bodes well for the economy and solid overseas demand will continue to be a major driver for economic growth," said So Jae-yong, an economist at Hana Daetoo Securities in Seoul.

South Korea's PMI mirrored that for Japan, released last Friday, which showed manufacturing contracted for a second consecutive month as slowing demand and a rising yen led to the first drop in export orders in more than a year.

[Source: By Simon Rabinovitch and David Milliken, Reuters, Beijing and London, 01Nov10]

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