January 4, 2010 / 8:34 AM / 8 years ago

RPT-UPDATE 2-China HSBC PMI hits fresh high, warns of inflation

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* Dec HSBC PMI highest since survey began in Apr 2004

* Output prices increase at fastest rate in 17 months

* Export orders, employment also up strongly (Adds analyst comment)

By Simon Rabinovitch

BEIJING, Jan 4 (Reuters) - China’s factories cranked up production in December on the back of bulging order books, but the strong demand also pushed prices higher and raised the spectre of inflation, according to a manufacturing survey.

The HSBC purchasing manager index (PMI) rose to 56.1 in December, up from 55.7 a month earlier and the highest since the survey began in April 2004. A reading above the watershed mark of 50 indicates an expansion of manufacturing activity.

It capped a remarkable turnaround for Chinese factories, with the PMI averaging its highest quarterly reading in survey history in the final three months of 2009 after plumbing a record low a year earlier.

The findings were largely consistent with China’s official PMI, released on Jan 1, which surged to a 20-month high in December. For story, double-click on: [ID:nTOE600006]

To see a graphic on China's PMI trends, double-click: link.reuters.com/huk59g

“The second-round effect of stimulus measures is filtering through to substantially benefit the manufacturing sector,” said Qu Hongbin, chief China economist at HSBC.

Heavy public spending on infrastructure launched in the depths of the global financial crisis in late 2008 has catalysed private investment in factories and property, driving demand higher for manufactured goods from drain pipes to electrical wire.

INFLATION WORRIES

But the government’s very success in getting the economy back into gear is fueling concerns about inflation.

Chinese manufacturers raised their prices at the fastest rate in 17 months in December, according to the PMI. Companies said the inflationary pressure came from a combination of buoyant market demand and rising raw material prices, particularly steel.

Qu noted the “significant increase” in output prices but remained calm. “We believe inflation will be manageable in the coming months,” he said.

Many analysts believe that industrial overcapacity will restrain price pressures and that the government will rein in money growth to keep a lid on inflation.

The Chinese leadership has pledged greater policy flexibility this year, which the market has interpreted as a pledge to gradually shift to a tightening bias after taking only small steps until now to wind down ultra-loose monetary policy.

But before officials adjust their stance, they will want to see both stronger exports and a healthier job market. The PMI offered good news on both fronts.

New export orders, which rose throughout the second half of 2009, surged to their fastest growth in nearly five years -- a marked contrast to steep falls at the end of 2008.

And factories, looking to satisfy the strong demand, created jobs at the third-fastest rate in survey history in December, albeit down from a record two months earlier.

“This all suggests that the case for tighter policy, including a stronger currency, is likely to build in coming months,” Brian Jackson, an economist with Royal Bank of Canada in Hong Kong, said in a note to clients.

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HSBC China PMI (seasonally adjusted):

Dec Nov Oct Sep Aug Jul Jun May Apr Mar

56.1 55.7 55.4 55.0 55.1 52.8 51.8 51.2 50.1 44.8

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Markit, the British research firm that compiled the PMI for HSBC, also highlighted these findings:

* Manufacturing production rose sharply in December. Output levels have now risen for nine successive months.

* New order volumes also expanded for the ninth straight month in December. The rate of increase in new work accelerated at its fastest in four months.

* Stocks of finished goods fell for the second successive month in December, with manufacturers running down inventories to meet increased demand.

* Stocks of raw materials and semi-manufactured goods rose for the second time in three months, as firms increased their purchases.

* Buying activity by manufacturers rose at the second-fastest rate in survey history. This pressured suppliers in December, with delivery times lengthening for the fifth straight month. (Reporting by Simon Rabinovitch; Editing by Chris Lewis and Jonathan Hopfner)

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