BEIJING (Dow Jones)--China's manufacturing activity powered ahead in December, although rising production costs signaled inflationary pressures are growing as the domestic economy continues to recover.
The HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, rose to 56.1 in December from 55.7 in November, HSBC said Monday. The PMI was above 50.0, a level that indicates growth, for the ninth straight month.
On Friday, another widely watched PMI issued by the National Bureau of Statistics and the China Federation of Logistics and Purchasing showed manufacturing activity expanded for the tenth straight month to 56.6 in December from 55.2 in November.
The gains in both PMIs came as employment and new orders remained above the expansionary mark. Input and output prices rose and new export orders, an indication of coming exports, stayed above 50.0 as well, the data showed. A reading below 50.0 indicates contraction.
The PMIs, which are the first economic indicators to round out 2009, also indicate China's economy likely grew at its fastest pace in the final quarter of last year since the global economic crisis, aided by Beijing's government-led stimulus program.
Independent research firm High Frequency Economics said in a note Monday that China's gross domestic product likely grew 10.2% in the October-December period from a year earlier, which would be higher than the third quarter's 8.9% growth.
"The second-round effect of stimulus measures is filtering through to substantially benefit the manufacturing sector as we expected," said HSBC Chief Economist for China, Hongbin Qu. He said that while input and output prices are up, inflation should be manageable in the coming months.
In early 2009, China's consumer price index, which is measured on a year-on-year basis, began to drop, which means the country's key inflation gauge could register high headline figures in the first few months of this year because of a low comparison base.
There is a chance that potential trends for inflation in the first quarter of 2010 could lead to the risk of inflation being overestimated, Morgan Stanley said in a research note. That likely means there will be a disconnect between the actual inflation rate and China's policy stance on the one hand, and strong inflationary expectations on the other, it said.
Zhang Liqun, an analyst specializing in the CFLP PMI, said on Friday that the rise in input prices shows production costs are increasing, which means that companies need to increase their competitiveness amid the changing environment.
The new export orders component in the CFLP PMI fell to 52.6 in December from 53.6 in November, although the HSBC PMI showed they continued to rise in December. Companies surveyed attributed growth in new export orders to firmer external demand, and also partly to competitive pricing, HSBC said.
