In September, China's official Purchasing Managers Index, a major indicator of the strength of the manufacturing sector, reached 53.8, a further expansion after the 51.7 registered in August (see Chart 1), which was preceded by four consecutive months of decline. Those four months had some of us quite worried about the sustainability of China's economic recovery, yet September has reinforced the positive outlook. Granted, September is traditionally a strong month for China's manufacturers as it marks the beginning of Christmas orders from foreign markets, yet the encouraging manufacturing outlook is supplemented by gains in exports, investment and consumption.

Usual growth suspects 

In September, China's exports amounted to $145 billion, an increase of 25.1 percent year on year (see Chart 2). With imports reaching $128.1 billion, an increase of 24.1 percent year on year (see Chart 3), China posted a $16.9 billion trade surplus. The surplus was the smallest in five months yet China's trade surplus in the third quarter of 2010 was still the largest since the depths of the financial crisis in 2008. Also in the third quarter, China's foreign exchange reserves rose $194 billion to reach a record $2.65 trillion, by far the world's largest currency reserve holdings.

Sales by China's industrial companies, both state-and privately-owned, increased by 33.4 percent in the first eight months of the year to 43.1 trillion yuan ($6.43 trillion), while profits increased by 55 percent. As China's stimulus package gradually recedes, the momentum of the economy will be bolstered by strong corporate spending and investment by firms which clearly have the means to do so, and this will in turn add to the government's fiscal resources. The government, moreover, has pledged to complete a range of construction and public housing projects under the two-year stimulus program, which is set to expire this year. August also saw the first acceleration in new bank lending in four months. In this month, China's banks extended 545.2 billion yuan ($81.4 billion), and this further increased to 595.5 billion yuan ($88.9 billion) in September. In response to this substantial expansion in lending, China's central bank in early October required banks to raise their deposit-reserve ratio by 50 basis points.

Retail and catering sales in China during the recent October 1-7 holiday increased 18.7 percent year on year, reaching 592.5 billion yuan ($88.4 billion), and this followed strong retail sales growth for the month of August of 18.4 percent. Sales of passenger cars to dealerships increased 19.3 percent year on year to 1.21 million in September on the back of a range of incentives for buyers. China's auto market had surpassed the United States as the world's largest in 2009 with 13.6 million units sold, yet sales in 2010 is set to increase further to 17 million units.