China’s manufacturing expanded for a third month, adding to evidence that the world’s third-largest economy is recovering from its deepest slump in almost a decade.

Loan growth, accelerating fixed-asset investment and rising retail sales have spurred confidence that Premier Wen Jiabao’s 4 trillion yuan (US$586 billion) stimulus package is reviving the economy after exports collapsed. Chinese stocks rose by the most in almost a month and Australia’s dollar traded near an eight-month high on optimism China’s demand for commodities will rise.

“The Chinese economy is well on track for recovery and economic growth is picking up steam,” said Lu Ting, an economist at Merrill Lynch & Co. in Hong Kong. “The PMI may trigger a rally for asset prices, especially commodity prices.”

The Shanghai Composite Index rose 3.2 percent as of 2:53 p.m. local time Monday, taking this year’s gain to 49 percent as investors bet that stimulus spending will revive earnings.

The world economy is seeing “initial signs of improvement,” Treasury Secretary Timothy Geithner said in Beijing Monday, where he’s meeting Chinese leaders. “The global recession seems to be losing force.”

Worst is over?

US manufacturing probably shrank in May at the slowest pace in eight months, a further sign that the worst of the slump may be over, economists said. The Institute for Supply Management’s factory index rose to the highest level since September, according to the median forecast of 63 economists surveyed by Bloomberg News.

In China, a second manufacturing index released today, by CLSA Asia-Pacific Markets, also showed an expansion.

“For the first time the PMI shows genuine evidence that policy really is gaining traction,” said Eric Fishwick, head of economic research at CLSA in Hong Kong. A jump in orders and declines in companies’ inventories suggest “sustained output growth in months to come.”

By the end of April, China had built 20,000 kilometers (12,430 miles) of rural roads, 214,000 low-rent homes, 445 kilometers of highway, and 100,000 square meters (1.08 million square feet) of airport buildings under the stimulus plan, the National Development and Reform Commission said on May 21.

“Economic growth may continue to pick up in the future as accelerating investment and consumer demand boost industrial production,” Zhang Liqun, an economist at the State Council Development and Research Center, said in a statement with the official PMI.

Export orders gain

Zhang said that while business sentiment remains “weak,” a PMI reading above 50 shows that “the economy will continue to recover.”

In the government-backed PMI, the export order index increased to 50.1, the first expansion in 11 months. The output index fell to 56.9 from 57.4 and the new order index dropped to 56.2 from 56.6.

Dongfeng Motor Group Co., China’s third-largest automaker, said stimulus measures helped boost sales in the first four months of the year.

Industrial production growth may accelerate to 8 percent this quarter as stimulus spending gathers momentum, up from 7.3 percent last month and 5.1 percent in the first three months, the Ministry of Industry and Information Technology said May 22. Output may increase 10 percent in the second half, it added.

China’s economic growth may quicken to 6.8 percent this quarter from 6.1 percent in the first three months, according to a Bloomberg News survey of economists.

The official PMI, released jointly with the statistics bureau, spans measures of manufacturing activity including orders, inventories, output and employment.

Source: Bloomberg