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A rise in China's official manufacturing index coupled with a surge in bank lending to feed optimism on Wednesday that the world's third-largest economy may soon be on the road to recovery.
Central bank chief Zhou Xiaochuan said that government pump priming had scored early successes but remained wary with risks of bad loans and an export collapse still clouding the horizon.
The global importance of reviving the Chinese economy was underscored when data showed that car sales in China had topped those in the United States in January for the first time.
The highlight of China's economic news on Wednesday was the official purchasing managers' index, or PMI, for January, which rose to 45.3 from 41.2 in December and was well up from a record low of 38.8 hit in November.
Although the sub-50 reading indicated manufacturing was still contracting, Zhang Liqun, a government economist, said the index offered evidence that the economy was "gradually bottoming out".
Mingchun Sun, an economist with Nomura in Hong Kong, went a step further, saying that the worst was already past.
"The January PMI data at least provide further support to our view that GDP growth should be stronger in Q1 2009 than in Q4 2008," he said in a note. "China's GDP growth will be V-shaped in 2009, with the bottom already being reached in Q4 2008."
China's economy grew at 6.8 percent in the fourth quarter, dragging full-year growth to a seven-year low of 9.0 percent.
Faced with an abrupt slump, the government has stepped up efforts to boost demand through big spending and easier credit.
Although Beijing has so far spent only a small portion of its 4 trillion yuan stimulus package announced late last year, Sun said a jump in new orders showed that public investment was already providing vital support.
China's benchmark stock index rose for the third straight day in heavy trade as investors took heart in the positive numbers.
But Beijing can do little to prop up China's exporters as their main markets from the United States to Europe skid into recession.
The PMI sub-index for new export orders crept up in January to 33.7 but was so far below the break-even line that economists said the overall picture remained bleak.
"The January PMI report is encouraging as the natural end of de-stocking may produce some sense of economic confidence. But being 'less bad' is not the same as 'recovery'," Ken Peng, a Citigroup economist in Shanghai, said in a research note.
SURGING LOANS
Another sign that Beijing's campaign is bearing fruit came in a report that Chinese banks had answered the government's call and extended a monthly record of 1.2 trillion yuan ($176 billion) in new loans in January. [ID:nSHA11383}
The report in the official China Securities Journal followed earlier comments by Premier Wen Jiabao that the first 20 days of the month had seen a record number of new loans.
"China's appropriately easy monetary policy began to play a positive role in the fourth quarter of last year," People's Bank of China Governor Zhou said. But large-scale credit is not sustainable and could create risks for non-performing loans."
State media reported on Tuesday that China was set to spend 130 billion yuan in the second tranche of its stimulus spending, after allocating 100 billion yuan in the final quarter last year.
This would leave the government with 3.77 trillion yuan to disperse over the next two years.
Confidence that the Chinese economy is getting back on its feet could sway the government to slow the pace of monetary easing after it cut interest rates five times in the last four months of 2008.
But a 3.1 percent drop in the corporate good price index in December, announced by the central bank on Wednesday, served as a reminder that deflationary pressures are building in China and driving up real interest rates.
The end of the Chinese New Year holiday also means the end of store promotions, which could throw sand in the consumption engine that the government has been trying to fire up to ensure that the economy is driven by more than just investment.
"Markets have been leaning to expect less policy easing measures, as the leadership repeatedly highlighted that economic conditions could be improving," Peng at Citigroup said. "But this may still be premature, especially considering that consumer spending power is only beginning to show fatigue."
