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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 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:
"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
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,
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
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.
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
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
* 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
(Reporting by Simon Rabinovitch; Editing by Chris Lewis and