China's manufacturing Purchasing Managers' Index compiled by the National Bureau of Statistics and the China Federation of Logistics and Purchasing rose modestly to 50.2 in October, compared to 49.8 in September. This was the second rise in the NBS manufacturing PMI reading since May this year.

Breakdown by type of enterprises shows that large enterprise PMI came in at 50.9 in October (up 0.7 point), medium-sized enterprise PMI came in at 49.3 (down 0.5 point) and small enterprise PMI came in at 47.2 (up 0.5 point).

The NBS report commented that the further rise in the PMI to a level modestly above 50 suggests the economy has bottomed out and stabilized. In particular, the report commented that with the further gain in the components of new orders, new export orders and purchases, corporate sector's de-stocking process is likely to be close to an end, and the economy is likely to show gradual recovery in the coming months. In addition, the HSBC and Markit PMI gained notably to 49.5 in October, compared to 47.9 in September, and the flash October reading at 49.1.

In more details of the October NBS PMI report, the output component rose to 52.1 in October (up 0.8 point), hinting at some further moderate improvement in near term industrial activity.

By industry, output for sectors including textile and garment, timber processing and furniture manufacturing, petroleum processing and coking, electric machinery and instrument, ferrous metal mining, smelting and pressing came in above the 50-threshold.

On the other hand, output for sectors including tobacco processing, paper making, printing and cultural, educational and sport articles, food and beverage processing and manufacturing, metal product, special purpose equipment, chemical fiber, rubber and plastic product manufacturing were below 50.

The new orders component showed further gain by 0.6 point to record at 50.4 in October. This was the first time this component came above the 50-threshold since May this year, suggesting gradual improvement in demand conditions.

The PMI component on new export orders also rose again by 0.5 point to 49.3 in October, the highest reading since June this year. Regarding inventory conditions, the finished goods inventories component rose modestly by 0.2 point to 48.1 in October, still registering the second lowest level since January this year. The input price component rose to 54.3 in October, compared to 51.0 in September.

Taken the different indicators together seems to suggest that the manufacturing sector may see the turning point in inventory cycle in the fourth quarter, as the destocking pressure is lower and product prices in certain sectors (e.g. cement and steel) find some support.

Overall, the improvement in the October PMI readings suggests that the manufacturing activities have continued to recover. This reflects the impact of policy easing that has accelerated since May, including pick-up in infrastructure investment, fiscal expenditure, accommodative liquidity condition and monetary policy stance. In addition, stabilization in the housing market in recent months has also provided support to domestic demand.

On the policy front, we expect that the government will continue the policy easing measures at a similar pace, so as to ensure the firming up of the recovery process. However, the likelihood of significant pushup in stimulus measures is small. Fiscal measures will further support infrastructure investment and domestic demand. Monetary policy is likely to rely more on quantitative measures to manage liquidity in the economy. We expect no further rate cut and one more cut on the reserve requirement ratio for the rest of the year.

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• Chinese manufacturing picks up in Oct.
• PMI surge boosts recovery hopes

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