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Have traders overreacted over China’s grim economic prospects?

If you remember, commodity-related currencies took heavy hits over the summer when China’s poor manufacturing numbers hinted at a weakening economy. Well, things might be turning around for the Asian giant!

Here are 4 signs that China is back on its path to recovery:

1. Improved Manufacturing PMIs

Just last week, China’s official and HSBC final manufacturing PMI reports confirmed a return to expansion among small and large manufacturing firms.

The government’s numbers came in at a solid 51.0 while a separate report by HSBC and Markit Economics showed a 50.1 reading. Not only is that the first expansionary reading since April, but it’s also the biggest uptick in THREE years.

Even the underlying components inspired optimism, as new orders jumped and overseas demand rebounded.

2. Stronger Export Activity

China’s trade surplus in August came in at 28.61 billion USD, the highest this year. Exports, in particular, rose 7.2% from a year earlier compared to an estimate of 5.5% but imports dropped to 7% from 10.9%.

Apparently, improvement in manufacturing demand from the U.S. and the eurozone, China’s two largest markets, are boosting demand for Chinese exports.

3. Upward Growth Revisions

Even hotshot financial institutions are convinced that China has brighter economic prospects, as they upgraded their growth forecasts for the upcoming months.

A couple of weeks ago, Deutsche Bank announced higher growth forecasts for the current quarter from 7.5% to 7.7%.

JPMorgan increased its quarterly GDP estimates from 7.4% to 7.6% for Q3 and from 7.0% to 7.5% for Q4. For this year, Credit Suisse expects stronger growth of 7.6%, compared to their initial 7.4% estimate.

4. Stable Inflation Outlook

Earlier this week, China printed a 2.6% annual CPI figure for August, in line with analysts’ projections.

Economists are expecting to see sustained price stability in the coming months, which would make it easier for policymakers to add stimulus if necessary.

China’s Commerce Minister Gao Hucheng mentioned that subdued price changes would allow the economy to achieve its 2013 inflation goal of 3.5%, which would be just enough for the nation to sustain its ongoing recovery.

I’m sure you’re wondering how we can profit from all this. We are forex traders after all!

Chinese economic performance typically affects the Australian dollar most, as Australia is China’s BFF when it comes to international trade. Stronger economic activity in China could renew demand for Australia’s raw material exports, which would then boost production and growth in Australia.

Aside from that, a sustained recovery in the world’s second-largest economy would spell positive prospects for the entire global economy, which would help boost risk appetite.

With that, higher-yielding currencies such as the comdolls could stand to benefit.