International | Nov 01 2010
By Rudi Filapek-Vandyck
Operating conditions for Chinese manufacturs continued to strengthen at the start of the final quarter, with the rate of improvement quickening to the fastest since April, report economists at HSBC. The economists believe there is sufficient reason to assume this uptick in overall activity, which seems largely fueled by domestic demand, will also lead to an uptick in inflation this month and next.
HSBC anticipates Chinese CPI to peak for this cycle in November. The economists make no mentioning of any further tightening by the People's Bank of China, but other market commentators elsewhere are likely to show less constraints.
The above comments were made in the wake of the release of the HSBC/Markit Economics seasonally adjusted China Manufacturing Purchasing Managers’ Index that showed an improvement to 54.8 in October from 52.9 the previous month. HSBC economists are quick in pointing out this represents one of the largest month-on-month rises in the PMI since the start of the series in April 2004.
Also, this latest increase, which extends the current period of expansion to three months, marks the fastest since January. Where a rise in production was signalled, respondents commonly linked growth to higher intakes of new business, reports HSBC.
Overall new business received by Chinese manufacturing firms rose sharply in October, with the pace of expansion reaching a six-month high. However, a faster uptick in total new work relative to new export orders, which increased only modestly, suggested that total new business growth was centred on the domestic market in October, say HSBC economists.
They note backlogs of work rose for the fourth month running in October, although the rate of accumulation was only modest. Anecdotal evidence suggested that outstanding business growth reflected strong gains in new work.
Average input costs rose considerably in October, and at the fastest rate since July 2008. The PMI input prices measure has risen more than thirty-one points since July, highlighting the rapid extent which inflationary pressures have built within the sector. Prices paid for coal, cotton, grain and steel were all reported as having risen since September. Higher cost burdens were also reflective of attempts to meet government emission targets, state restrictions on electricity usage and, in some cases, the rising price of global commodity futures.
Output prices set by Chinese manufacturing firms rose further in October, with the rate of inflation hitting a twenty-seven month high. HSBC economists report the latest increase was the third in as many months, and faster than the long-run trend. Factory gate price inflation predominantly reflected the need to protect operating margins in the face of rising input costs.
