Activity in China's vast manufacturing sector hit a four-month high in August as new orders rebounded, a preliminary private survey showed on Thursday, reinforcing signs of stabilisation in the world's second-largest economy.
The Flash HSBC Purchasing Managers' Index rose to 50.1 from July's final reading of 47.7, which was the weakest in 11 months.
But it barely surpassed the watershed 50 line which demarcates expansion of activities from contraction, indicating that a sharp recovery is unlikely.
Risks range from continued weakness in exports to persistent overcapacity in key industries, which could saddle banks with more bad loans. And China's leaders are walking a fine line between tolerating slower growth and pushing through reforms needed to re-balance the economy to a growth model that is more reliant on consumption than investment and easy credit.
The government has announced a series of targeted measures to support the slowing economy, including scrapping taxes for small firms, offering more help for ailing exporters and boosting investment in urban infrastructure and railways.
But leaders have refrained from massive stimulus like that during the 2008/09 global financial crisis, which left a legacy of inflationary pressures and bloated local government debt.
The flash PMI "confirms that the economy has stabilised in the short term and downside risks for H2 have declined," said Zhiwei Zhang, a Chinese economist at Nomura in Hong Kong.
A sub-index measuring new orders rose to a four-month high of 50.5 in August from 46.6 in July. But the sub-index on new export orders edged lower in a reminder of weak global demand.
The employment sub-index of the flash PMI also picked up in August, but still hovered below the 50 watershed line.
"This is mainly driven by the initial filtering-through of recent fine-tuning measures and companies' restocking activities, despite the continuous external weakness," said Hongbin Qu, chief China economist at HSBC.
"We expect further filtering-through, which is likely to deliver some upside surprises to China's growth in the coming months."
The flash HSBC PMI, compiled by Markit Economics Research, is the earliest available indicator of monthly activity in the Chinese economy, and tends to focus more on small to mid-sized firms in the private