Chinese Manufacturing Rebounds in October

New data released overnight showed that the Chinese manufacturing sector may have bottomed over the last few months. Both the official Manufacturing PMI and the privately surveyed HSBC Markit China PMI showed a rebound in China's largest economic sector, boding well for the next few months domestically and for the global economy as a whole.

The official Chinese Manufacturing PMI released by the government showed that the manufacturing sector expanded in October. The survey of only the largest Chinese manufacturers showed that the manufacturing sector expanded for the first time in three months in October as the PMI rose to 50.2 from 49.8 in September. However, economists were expecting a reading of 50.3 but the fact that the manufacturing sector did expand was enough to send Chinese shares higher by over 1.5 percent overnight.

Also, the private HSBC Markit China PMI showed a rebound in the manufacturing sector. The survey rose to 49.5 from 49.1 in September and beat expectations of a flat reading at 49.1. This survey, which contains a greater number of Chinese manufacturers that tend to be smaller than the ones surveyed by the government, showed continued contraction in the sector, however at a much slower pace.

China's economy has been slowing as its two largest trading partners' economies have stagnated. The Eurozone, China's largest trading partner, has been stuck in a recession for most of 2012 following sharp austerity measures aimed at reducing debt loads. The U.S. has slowed due to deleveraging, political constraints and uncertainty, and pressures from the Eurozone as well, weighing on Chinese manufacturing as many of the manufactured goods are in turn exported to the U.S.

Materials stocks rallied at the open in New York trading on the positive news. The Materials Select Sector SPDR XLB rose 0.78 percent just after the open as higher growth and output in China generally leads to higher demand for raw materials which are inputs, as China is a large importer of these materials. Shares of Freeport-McMoRan Copper and Gold FCX rallied strongly on the news, rising 1.8 percent on the data.

The collective data points add to the thesis that China has or is in the process of bottoming and could see a rebound in growth through the end of 2012 and into 2013. Fiscal measures in the U.S. contained in the fiscal cliff could hurt exports to the U.S., but rumors of a Chinese fiscal stimulus in the new year still abound and could lead to a further pop in the economy. Historically, China has launched stimuli during the fall months, however economists believe that, due to the regime change set to take place at the end of the year, authorities will wait until the power change has concluded.