China's manufacturing sees hefty rebound in Aug.

China's manufacturing sector saw a strong recovery in August, offering further signs that the world's second-largest economy is moving out of the shadows of a protracted slowdown.

The Purchasing Managers' Index (PMI) for the manufacturing sector rose to 51.0 percent in August from 50.3 percent in July, marking the second monthly expansion in a row, and the highest reading this year, the China Federation of Logistics and Purchasing (CFLP) said on Sunday.

A reading below 50 indicates contraction, while anything above signals expansion.

The 70 basis point expansion also represents the biggest increase since January. In the months prior to August, the data had fluctuated.

Zhao Qinghe, a senior statistician with the National Bureau of Statistics (NBS), said the new data show that manufacturing activities have a stronger growth impetus and the economy is firming in a more evident way.

This scenario is also reflected in the PMI reading compiled by HSBC, which focuses more on small and medium-sized manufacturers. The general reading rebounded to 50.1 percent after dropping for three consecutive months.

China's economy has been stuck in a consistent slowdown, easing to 7.5percent growth in the second quarter from 7.7 percent in the first three months.

With the government's rebalancing efforts gradually taking effect,third quarter performance is expected to improve as predicted by the new data.

A breakdown of the August PMI shows growth over the previous month in all five sub-indices.

The sub-index for new orders jumped to a 16-month high of 52.4 percent, which is the most convincing evidence of a strong recovery, Zhao said.

Domestic demand warmed, with the gap between the sub-indices for production and new orders narrowing to 20 basis points, the smallest in seven months.

Also boosted by recovering demand, the sub-index for the purchasing prices of major raw materials surged to a six-month high of 53.2 percent. The sub-index for imports moved up by 160 basis points to 50 percent.

With improving economic performance by the United States and European Union, the sub-index for export orders edged up to 50.2 percent, the first time it stood above 50 percent since April.

Despite the positive signs, the gap between big companies and small businesses, which are the pillars of employment, continues to widen.

The PMI reading for big firms has stayed above 50 percent for 12 straight months, while that of small companies has stayed below 50 percent for 17 consecutive months.

This means the plight of small business has not been reversed, and the government needs to step up the implementation of favorable measures, Zhao Qinghe said.

The promising new data have reversed the bearish tones at investment banks.

Ma Jun, chief economist at the Deutsche Bank Great China, raised China's GDP growth forecast to 7.7 percent in the second half.

"If PMI readings keep growing at the current level, the industrial output growth could increase to 9.7 percent in the third quarter, and that will eventually shore up GDP," he said.

With businesses intending to replenish inventories, China's GDP growth will accelerate in the third quarter, said Barclays China economist Chang Jian.

The data have also boosted the confidence of entrepreneurs. CFLP data showed the business outlook sub-index for August climbed by 300 basis points to 59.4 percent.

Despite the strong recovery signs in the short term, economists warned the long-term prospects remain uncertain.

Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said healthy growth is still restrained by excessive reliance on investment, overcapacity and spiraling debts.

Zhang Liqun, a researcher at the Development Research Center of the State Council, said the country is at a critical stage of structural reform. Companies, especially small businesses, have to make strong efforts to cope with the new conditions.

Having faced a prolonged slowdown in the past two years, the Chinese government resolved to rebalance its outdated growth model by pursuing structural reforms instead of initiating massive stimulus programs.

In mid-August, Premier Li Keqiang underscored the role of reform in promoting sustainable growth, pledging to keep the economy from big fluctuations and maintain steady performance.

"To achieve sustainable and healthy development, we should stick to rebalancing the economy while keeping growth, employment and inflation within a reasonable range," he said at a meeting in Lanzhou City in Gansu Province, which was attended by provincial heads from the country's western regions.