Inflation puts brakes on manufacturing growth

08:39, December 31, 2010      

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Chinese manufacturing activity grew at its slowest pace in three months in December under pressure from a moderating economy and surging inflation, an HSBC survey said yesterday.

But price increases may have hit a peak in November as component indices showed a cooling pace of costs at the factory gate, the survey showed.

The headline seasonally adjusted HSBC Purchasing Managers Index, a comprehensive gauge of industrial activity across the country, fell to a three-month low of 54.4 in December. That compared to November's 55.3. A reading above 50 indicates expansion.

Although this month's data still pointed to a continued improvement in operating conditions, the manufacturing sector's overall growth seems to be losing momentum, HSBC chief economist Qu Hongbin said.

"Inflation rather than growth becomes the top policy concern, despite the moderation in December's manufacturing PMI reading," Qu said.

"We expect China to continue to rely on quantitative tightening measures to curb inflation and counter the impact of easing policies in the United States."

China has lifted interest rates twice in the past three months to tame surging consumer prices, which reached a 28-month high of 5.1 percent in November.

The survey showed that input prices increased for the fifth month running in December. Despite falling to a three-month low of 72.3 from 80.8 in November, the index was at a level indicative of a considerable rate of input cost inflation.

HSBC said many survey respondents commented on higher energy and fuel prices at the end of 2010, and some also noted increased costs for raw materials, with basic metals mentioned in particular.

Factory-gate prices set by Chinese manufacturers increased further in December, with almost 19 percent reporting a rise from the previous month, citing the need to pass on higher costs to customers.

This was reflected in the Producer Price Index, the factory-gate gauge of inflation which jumped 1.1 percentage points to 6.1 percent in November, a 28-month peak.

Higher costs of production have eroded profitability. In the first 11 months, the net income of Chinese industrial companies rose 49.4 percent from a year earlier to 3.88 trillion yuan (US$585 billion), slower than the 51.6 percent through October.

"The outlook for China's manufacturing sector is uncertain next year," said Li Maoyu, an analyst at Changjiang Securities Co. "There are many variables when the country's policy-makers want to transform the economic structure."

To move up the value chain, some companies which are very profitable at present, such as auto makers and miners, need to devote more resources to research and development, sacrificing short-term profitability to upgrade their products, Li said.

China is due to announce the official Purchasing Managers' Index tomorrow.

While the official PMI is weighted heavily toward big domestic companies, the HSBC survey is slanted more toward privately owned and export-oriented firms.

Source: Shanghai Dailiy
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