China’s manufacturing expanded at the slowest pace in six months as higher interest rates and lending curbs aimed at containing inflation damped demand.
The Purchasing Managers’ Index fell to 52.2 from 52.9 in January, the China Federation of Logistics and Purchasing said on its website today, the third monthly decline. The gauge of input prices climbed to 70.1, the highest level since November.
Premier Wen Jiabao pledged Feb. 27 to contain gains in consumer prices and tackle surging property prices that could threaten social stability in the world’s most populous nation. Wen may outline additional measures to tame inflation and cool economic growth when he opens the annual session of the National People’s Congress later this week.
“This is a good number, suggesting Beijing’s policy tightening is starting to cool excessive growth and inflation,” said Qu Hongbin, Hong Kong-based economist at HSBC Holdings Plc. The government “still needs to step up measures to combat inflation in the months ahead,” he added, predicting the central bank will raise interest rates and banks’ required reserve ratios further.
The benchmark Shanghai Composite Index rose 0.5 percent to close at 2,919 today, while remaining down about 7 percent from a Nov. 11 high amid concern that monetary tightening will hurt earnings in the world’s fastest-growing major economy. The yuan rose 0.02 percent in Shanghai to 6.5703, according to China Foreign Exchange Trade System in Shanghai.
Oil Prices
“Cost-driven inflation pressure is still large,” the logistics federation said in a statement today accompanying the data release. “Upward pressure on the CPI is still significant,” the federation said, citing a drought in China that’s boosted food prices, the impact of Middle East turmoil on oil and liquidity injections by the U.S. Federal Reserve.
In contrast with China, India’s manufacturing grew at the fastest pace in three months, a survey by HSBC and Markit Economics today showed, adding to pressure on the central bank to increase interest rates for the eighth time in a year.
In the U.S., the Institute for Supply Management’s manufacturing index rose last month to 61, the highest since May 2004, from January’s 60.8, according to the median estimate in a Bloomberg News survey of 77 analysts. A German manufacturing index, also expected today, is forecast to have held at 62.6, according to the average estimate of 19 economists.
Higher Prices
China raised gasoline and diesel prices on Feb. 20 by as much as 4.6 percent after crude oil in London rose above $100 a barrel. The government previously increased costs on Dec. 22.
Consumer-price inflation may have cooled to 4.8 percent in February from 4.9 percent in January, China International Capital Corp. and Shenyin & Wanguo Securities Co. said on Feb. 25.
Still, non-food inflation rose to the highest in at least six years in January and companies including Qingdao Haier Co. and Gree Electric Appliances Inc., the biggest makers of refrigerators and air-conditioners in China, will pass on higher prices to consumers, GF Securities analysts said on Feb. 28.
Chinese steel mills including Baoshan Iron & Steel Co. and Angang Steel Co. said last month they raised prices for March and April delivery. Cement prices may rise by more than 10 percent this year as government projects spur demand, Citigroup Inc. analysts wrote today, benefiting companies including Anhui Conch Cement Co. and China Resources Cement Holdings Ltd.
Input Prices
The People’s Bank of China has already raised its benchmark one-year lending and deposit rates three times since mid-October and imposed eight publicly announced increases in the reserve requirement ratio. It has also used the so-called differentiated reserve requirement on 40 banks, adjusting the level of deposits individual lenders must keep as reserves.
“Today’s PMI shows input prices continued to rise at a very fast pace,” said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong. “Inflation pressures in China have been building even before the latest spike in oil prices and today’s data should further reinforce the case for more policy moves.”
Jackson forecasts two more increases in interest rates and an appreciation in the yuan to 6.20 against the dollar by the end of the year.
February’s PMI reading compares with the median forecast of 52.1 in a Bloomberg News survey of 14 economists. A reading above 50 signals expansion.
Slowest Expansion
A separate manufacturing index released by HSBC and Markit Economics fell to 51.7 in February from 54.5 in January, the slowest pace of expansion in seven months. The gauge was higher than the 51.5 preliminary figure released by HSBC on Feb. 21, the first month the bank has released an advanced reading.
Data in the first two months are typically distorted by the timing of the weeklong lunar new year holiday. The break fell on Feb. 3 this year, almost two weeks earlier than last year.
The output and new-orders sub-indexes in the logistics federation survey indicated the slowest expansions since August, according to today’s data.
“As many manufacturers, especially exporters, do not resume full production for several weeks after the official week-long holiday has ended, February’s reading might be distorted on the downside,” Goldman Sachs Group Inc. economists Yu Song and Helen Qiao wrote in a note today.
The manufacturing survey released by the logistics federation and the National Bureau of Statistics covers more than 820 companies in 20 industries, including energy, metals, textiles, automobiles and electronics. The HSBC study covers more than 400 businesses.
China’s economic growth accelerated to a 9.8 percent annual pace in the fourth quarter, overtaking Japan as the world’s second-biggest economy.
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