China's production, input prices rise


China's factories revved up production in November, but a big jump in input prices pointed to more inflationary pressure in the pipeline and a need for more monetary tightening.

The official Chinese purchasing managers' index (PMI) rose to a seven-month high of 55.2 in November from 54.7 in October, topping the median forecast of 54.7.

A separate survey of China's manufacturing sector sponsored by HSBC had a virtually identical trajectory, climbing to an eight-month high of 55.3 from 54.8 a month earlier.

While a rise in output and new orders powered the rises, the biggest increase came in the sub-index for input prices, which climbed to 73.5 from 69.9 a month earlier in the official PMI.

"The main problem for the economy is still inflation," said Jun Ma, China economist at Deutsche Bank in Hong Kong.

"As you can see from the input price index, we are not only seeing the consumer price index (CPI) rising but also the producer price index (PPI), as indicated by this sub-index, rising strongly. PPI, after a few months, will transmit its impact to CPI."

It is the 21st straight month that the official PMI has stood above the threshold of 50 that separates expansion from contraction.

As indicators of impressive growth momentum, the strong PMI readings could help to dispel some of the anxiety in financial markets about the impact of measures by the People's Bank of China to tighten monetary policy.

In its battle against inflation, China has officially increased banks' reserve requirements five times this year, restricted the issuance of credit and also increased interest rates once. Many analysts expect another rate rise before the end of the year. There have been reports in local media that authorities may lower the ceiling on bank lending next year.

"Good news from the economy may not be that good for the market as it is concerned about more tightening," Ting Lu, an economist with Bank of America-Merrill Lynch, said in a note. "The high PMI reading could convince Beijing to tighten a bit more on the margin."

The pace of the increase in prices paid by manufacturers has been breathtaking. In the HSBC survey, the input price sub-index is up almost 36 points since July. The same sub-index is up 23 points in the official PMI over that same period.

Inflation sped to a 25-month high in October, as consumer prices rose 4.4 per cent from a year earlier, and it is expected to have edged higher in November.

Economic growth has slowed a touch in the second half of the year, but GDP is still on course to rise about 10 per cent this year.

"The continued increase in the PMI in November indicates an improvement in the economic outlook. This is in line with relatively fast investment, export and consumption growth this year," said Zhang Liqun, a government researcher.

But he also noted that while the PMI had served as a leading indicator in the past, growth of industrial output had been moving in the opposite direction from the manufacturing survey in recent months, adding that this might continue.

"The current economic situation is relatively complicated. There is great uncertainty in its future trend," Zhang said in a comment on behalf of the China Federation of Logistics and Purchasing, which compiles the official PMI.