Economy

China's PMI at 7-month high, input prices jump

(Agencies)
Updated: 2010-12-01 10:32

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

The official purchasing managers' index (PMI) rose to a seven-month high of 55.2 in November from 54.7 in October, the China Federation of Logistics and Purchasing said on Wednesday.

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The reading compared with the median forecast of 54.7 in a Reuters poll of 11 economists.

While a rise in output and export orders helped power the rise, the biggest increase came in the sub-index for input prices, which climbed to 73.5 from 69.9 a month earlier.

"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," he said.

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

Battling Inflation

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 and there has also been talk of a lower 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 a tighten bit more on the margin."

Inflation sped to a 25-month high in October, rising 4.4 percent from a year earlier, and it is expected to have edged higher in November. Growth has slowed a tough in the second half of the year, but the Chinese economy is still on course to expand about 10 percent this year.

"The continued increase in PMI in November indicates an improvement in 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 logistics federation, which compiles the index for the National Bureau of Statistics.