Robust factory output brings risk of inflation
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China's factory output continued to strengthen in November, with the greatest improvement in the official purchasing managers' index (PMI) in the past seven months, but the fast clip in input prices still points to rising inflationary pressure, analysts said.
The PMI, which measures industrial activity, rose to 55.2 in November from 54.7 in October, the China Federation of Logistics and Purchasing (CFLP) said on Wednesday.
It marked the 21st straight month that the figure has stood above the threshold of 50 that separates expansion from contraction.
"We think that manufacturing activities are entering a stable expansion phase and will continue to strengthen in the coming months," said Nomura International (HK) Limited in a report.
Wang Qing, chief China economist at Morgan Stanley Asia, said the figure exceeded a market consensus of 54.8 in a Bloomberg survey, and is slightly higher than the average of historical readings of 55 in November.
"The November PMI suggests that the regained (growth) momentum since the third quarter has continued well into the fourth quarter," he said.
But he predicted a modest decline in the index in coming months as the nation's escalating inflation-fighting measures are set to bite into business activities.
The output sub-index under the November PMI rose by 1.4 to 58.5. Meanwhile, the order sub-index exhibited a recovery trend as export orders rose by 0.6 to 53.2 and new orders increased by 0.1 to 58.3, driven by the resilience of domestic demand.
Noticeably, the import sub-index declined 2.2 to 50.6, pointing to the impact of surging international commodity prices on domestic demand, and the inventory sub-index increased by 2.0 to 47.7 in November, but still below the warning line of 50, according to CFLP.
The biggest contribution to the overall index improvement still came from the purchase price sub-index, which climbed 3.6 to 73.5 in November after an increase of 4.6 to 69.9 in October, its highest since July 2008.
"The data indicates there are no worries about China's general economic demand, and the government can easily take decisive measures to tackle inflation," said Dong Xian'an, chief economist with the Industrial Securities.
The most likely measure the government would take to fight inflation would be an interest rate hike of 50 basis points, Dong added.
Also published on Wednesday, the HSBC PMI posted 55.3 in November, up from 54.8 in October, marking the strongest pace in eight months of overall improvement in business conditions.
"The latest increase was steep, and much stronger than the long-run series average," HSBC said. It added that considerable price pressures were also indicated by November's survey, with both output and input prices rising at substantial and accelerated rates.
"The stronger reading of the November PMI, especially the faster rise in input prices, against the backdrop of the Fed's second round of quantitative easing, is likely to translate into concern about inflation," said Qu Hongbin, chief economist of China & Co-Head of Asian Economic Research at HSBC.
"We expect Beijing to step up its efforts in terms of quantitative tightening and to hike interest rates by 25 basis points in the coming months to check inflation."
But Wang Qing of Morgan Stanley said although the policy tone has recently been increasingly hawkish, it does not necessarily suggest an imminent interest rate hike. "We expect the government to continue to rely on liquidity management and direct price intervention to combat inflation."
